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The Barometric Indicators for the Best Car Loan Rates

Updated on November 6, 2015

If you are one of the those persons who keep wondering how people in Abu Dhabi, Dubai or the UAE in general get to drive around in McLarens, Paganis and Lamborghinis, you are in a queue that could stretch across the globe. It would be a natural question for almost anyone, be it an old national or a fresh expatriate. The normal explanation that you would receive from most is that the UAE is a tax free region and that’s the reason why people are able to enjoy luxuries such as these. While that is not entirely untrue, there are portions of the iceberg that might not be quite evident. So, how do you go about getting a car that’s fancy enough by your standards?

Driving a McLaren! How do they do it?
Driving a McLaren! How do they do it? | Source

Car Loans and Financing in Dubai

If you happen to chance upon a pot of gold while reading this article, or suddenly get access to an ancestral property worth billions, there wouldn’t be any compulsion for you to read further. If you have savings that you planned for a dream car, perusing through this post would be futile too. But, if you still want to profit from your recently begotten means or want an option before breaking the bank on that term deposit, you will find this post useful.

Dubai, being in the United Arab Emirates, has Sharia’a compliant laws. In accordance with the same, the presence of Islamic banking in the region is more or less equally strong as compared to conventional banking options available. While conventional financing will require pretty much the same procedure as followed across the globe, Islamic financing has a slightly different approach to the concept of loans, or in this specific case, car loans.

Even if you can't buy it, you can lease it. All thanks to Islamic Banking!
Even if you can't buy it, you can lease it. All thanks to Islamic Banking!

Conventional banking will require a down payment on the initial value of the car, which is mostly 20% of the amount. The rest of the amount is covered by the car loan and applicable rates of interest are levied per year for the entire term of the loan. That holds true for new or for used cars.

Islamic banking, being Sharia’a compliant, has a policy of no interest rates. As per that, you’d be charged an upfront fee which would be added to the amount of loan and payable at deferred dates. That is the conventional mode available in Islamic banking. However, as per its own concepts, Ijarah can also be utilized to avail a car. This basically allows the bank to purchase the car as its own property and give it to you on a lease-to-purchase basis. That way, the entire financing is done ideally by the bank itself and as you keep paying up the lease amounts per month, the bank’s ownership over the vehicle decreases and your ownership gradually increases. At the end of the lease period, the car is practically yours. An added advantage to this is the fact that till the end of the lease period, the car is basically the bank’s property. Any complaints regarding the performance of the asset will be addressed by the bank.

Getting the Sweet Spot in a Car Loan

Considering both options are available to you, choosing a financing option becomes all the more important. Additionally, to ensure that you are eligible for the best deals in the market, there are a couple of things to bear in mind –

  1. Salary requirements – Some banks offer great interest rates and repayment periods along with having no conditions for citizenship, but require you to have your salary deposited in an account with them. Plus, there are considerations of a minimum salary amount in order to be eligible for a car loan. Typically within the range of AED 500-15,000, that amount also plays a key role in deciding the maximum financing that you can avail
  2. Repayment ability and credit score – Both of these actually go hand in hand everywhere, not just in Dubai. If you have quite a few financial liabilities already, most banks would not be willing to allow an extra car loan to be availed. The same goes for the credit score, if it is way too low or in the mediocre levels, chances of getting a car loan processed could be slim. It is imperative that you decide how much of a monthly repayment would be conducive in the face of any sudden financial crisis. A costlier car will have a larger monthly repayment value
  3. National or expatriate – While not much can be done on this aspect, it is a consideration with many banks and normally, nationals are allowed a higher amount of loan when compared to expatriates.

If the above points resonate well with you, then you need to look at the external factors. Those can be outlined as below –

  1. Interest rates (Flat/Reducing) – Many banks advertise both the flat and reducing rates on car loans. Flat rates are the percentages charged on the principal amount, irrespective of whatever payment has been done. This rate remains fixed throughout the tenure of the loan. Reducing rates are the ones that are applicable on the reduced balance at the end of a payment term. These rates should be compared only with their appropriate counterparts and not mixed up. But in case a bank’s advertised rates include only a reducing rate, dividing that by 1.813 basically gives you a flat rate. If it’s the other way around, multiply the same factor
  2. Arrangement fee – This is an upfront fee, typically 1% of the loan amount or a fixed sum, that is added to the loan amount or can be paid initially upfront
  3. Early settlement or prepayment fees – Prepaying the loan might be a great thing for you, but for banks, it means cutting down on their interest or profit. While some banks tend to waive this off after a certain period of the loan tenure has passed, it is always wise to check the fine print
  4. Finance amount – Maybe you have no other financial liabilities and you are confident about your repayment ability for a Lamborghini. But making a judgement call about the extent of your means is important. If the financing is too high, it could affect your financial situation in the long run. Even if your life is smooth now, you need to have backup for the future, just in case.

Even though it might seem impossible in the beginning, but considering a few things you may end up driving a fancy car yourself!
Even though it might seem impossible in the beginning, but considering a few things you may end up driving a fancy car yourself!

Going in For the Kill

All the necessary precautions in place, you are finally ready to go for a car loan. How do you maximize on the deal? The answer, lies in the demographical and social situations affecting the market.

At the time of special occasions or festivities, banks launch promotional offers that could offer anything from zero-interest periods to deferred down payment schemes. Additionally, new car dealers or the ones who haven’t been able to perform all that well during the rest of the year might come out with exclusive Ijarah schemes. When you combine these nice oddities with your already available knowledge of interest rates and complying fees, your car might come home with a lot less hassle and financial worry.

Car loans are a liability just like any other loan. Cars being a commodity that has a rapid depreciation rate, proper attention must be paid to the usability of the vehicle that you might be considering to purchase. In case you are not staying for a long time in Dubai, getting a lease-to-own agreement for a car from an Islamic bank might be a better deal.

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