For new residents, settling in the UAE can encounter a number of costs. One of the biggest outlays is rent, which is paid up front for the entire year, leaving many with little to spare in those first few months. However, when it comes to buying a car, local auto loan interest rates are relatively low at 2 to 4 per cent versus more than 5 per cent in other markets. With many banks competing for loan seekers, even stationing themselves in car dealerships to lure customers, car financing is quite prevalent in the Emirates with 60 to 70 per cent of car buyers looking to take out a loan. So what factors do consumers need to consider when signing up for car finance and how do they calculate how much they can borrow? Firstly, remember UAE banks have a minimum eligibility criteria for securing a car loan:
1. No more than 60 months
Loans for the financing of new or used cars have a tenure of up to a maximum of 60 months. However, the maximum tenure of a loan can be shorter for older used cars. For example, some banks require that a used car is no older than 10 years upon completion of the loan. As a result, a 2010 model bought today could only secure finance for under two years.
2. 20 per cent down payment
Consumers can only finance 80 per cent of the new or used car’s value, which implies a 20 per cent down payment. The down payment is generally paid directly to the bank, which then in turn settles the full value of the used car with its owner. However, a few banks in the UAE ask used car buyers to settle the 20 per cent down payment directly with the seller after which the bank will settle the remaining 80 per cent of the car's value. Of course, dealers can offset the 0 per cent down payment by discounting the invoiced price of the car via a promotion.
3. At least Dh25,000
Many banks will have a minimum loan value they are willing to finance, which is generally around Dh20,000. Since banks finance 80 per cent of the car’s value, this means a minimum car value of Dh25,000 is required for the car to qualify for financing (that is 80 per cent of Dh25,000, which yields a Dh20,000 loan).
4) Monthly payments must be less than half your salary
This means that the resulting Equal Monthly Installments (EMI) of your used car loan cannot be greater than half your salary minus existing liabilities, which includes credit cards. So if you make Dh10,000 a month, your resulting car loan monthly installments cannot be greater than Dh5,000 a month. If you already have any other loan and you are paying off say Dh1,000 a month, then your new loan monthly installment cannot be more than Dh4,000 and so on. If you have credit cards, then generally 5 per cent of your credit card limit counts towards your existing liabilities.
What car you can afford
To help you calculate how much you can borrow, start off with half of your monthly salary and subtract any existing monthly installments that you already pay. Then subtract 5 per cent of all your credit card limits. This will tell you the maximum monthly car loan installment you are eligible for.
Then multiply this by 60 months, with the resulting figure the approximate car value you can go for. Reduce that number by 3 to 4 per cent to account for the interest your lender bank will charge you. Now that you know the numbers, you can actually start shopping for a car.
The documents you need for a car loan
You can borrow from any financial institution in the UAE, not just the bank your monthly salary is remitted to. This gives you the freedom to shop around for the best interest rates. To apply for the loan, you must submit three months' bank statements, a salary certificate and a valuation certificate for the car you want to purchase. You must also be a UAE resident, have a valid UAE driving license and have a clean financial record, backed up by a salary certificate and a healthy credit report from the Al Etihad Credit Bureau.
Most car showrooms and dealerships have a few bank representatives on hand for customers to compare interest rates on the spot. Comparison websites also let you compare options online.
Raaed Sheibani is a growth hacker at CarSwitch.com