The mechanics of a car loan

In these frugal times, banks are increasingly vigilant about who receives their cash. Ensuring your numbers look appealing is essential to success.

While acquiring a bank loan can be challenging, poor sales have resulted in promotions and a greater willingness to negotiate price.

Planning to finance the purchase of a car? You would be wise to pay off or reduce any other debt before applying for a car loan. Getting any type of loan has been difficult since October and car dealers say they have not seen any signs of banks starting to lend again. "Nothing has changed," says Samer Adel Doueier, the showroom supervisor at Ali and Sons, the Abu Dhabi Volkswagen dealer. Despite a change by HSBC last week to halve the minimum salary required for a car or personal loan to Dh10,000 (US$2,722), dealers are not hopeful of much improvement since the bank made it clear the application criteria in other categories would be tightened. The move simply brought HSBC in line with the requirements of other banks. Although tougher conditions have led to a dramatic spike of rejections this year, obtaining a loan is not impossible, especially if you get a few things in order. "The most important criteria is your salary and how much other loans you have, and they really care mostly about how much goes into your account." Mr Doueier says. If you earn Dh20,000 a month and your company deducts Dh7,500 towards your rent, then for a bank's purposes your income is Dh12,500. One car dealer says it is best just to declare the amount going into your account as your income rather than your total salary. He says many banks consider any deductions a liability that can potentially increase, and who could blame them when rental prices in Abu Dhabi are still increasing. Banks these days have taken prudent lending to new levels; examining several months of financial statements and contacting your employer regarding job security. In general, however, if you earn Dh15,000 a month, or at least Dh10,000 is credited into your bank account, and your debt obligations are not leaving you short of cash, you should qualify. The standard these days is that no more than 60 per cent of the money deposited into your bank account can go towards paying off a car and other loans. However, some banks are also looking for excuses not to approve loan applications. So many factors can work against you, some of which you have no control over. For instance, banks have shut the door on employees in certain sectors or have made it harder for them to qualify for a loan. "The major thing that affects consumer banking is job loss, so we have to be careful with segments that have risks, like property and banking," says Arup Mukhopadhyay, the executive vice president of retail banking at Abu Dhabi Commercial Bank. Even outside those industries, who employs you can make a difference. Government employees, for instance, are on a better footing because those working in the private sector are more likely to be affected by the global recession. Another important issue is how long you have been in the country. The requirements vary from three months to two years with your chances greatly improving if you have been here more than six months. So if you have just arrived, look for a good car to hire because you will have plenty of time for window shopping and deciding what brand to buy when you become creditworthy. One way to overcome some of these restrictions would be for family members to help each other. One family member who may be more creditworthy could finance the car, even if it will be registered under a different name. There are few factors in the lenders' assessment that you have control over. For instance, if you remit money to your home country every month, banks could interpret that as a loan obligation there, especially if it is always the same amount. One Abu Dhabi dealer recommends using money exchangers, and not to keep emptying your account in the months leading up to your loan application. "Split the money withdrawal and do it in different days of the month each time," he says. If you are buying a used car, the brand you choose can improve your chances or increase the duration of repayment. For instance, at National Bank of Abu Dhabi (NBAD), loans on used cars have to be repaid within four years but the bank can extend that for pre-owned BMWs, Toyotas or Nissans. The minimum monthly salary for car loans with NBAD is Dh10,000 for account holders and Dh15,000 for others. Your chances of getting a loan are better from the bank at which your salary is deposited. Car dealers looking for a lender will start with the bank where you have a direct deposit. HSBC's move last week to halve the minimum salary from Dh20,000 applies only to those who have an account at the bank. The credit crisis and the reluctance of banks to lend are already giving consumers choices that have been widely available in the West but until now were absent in the UAE, simply because there was no need for them. Leasing, for instance, has never been a popular option. But a few weeks ago, Ali and Sons began a leasing programme with the option to buy after the first year for Audi cars. "It's definitely something people are interested in," says Tom Pryor, the marketing manager at Ali and Sons. A lessee must pay at least three months in advance at the start, and then make regular payments. After one year, the lessee may buy the car or lease another. BMW has also started offering leasing to offset low sales. Even some car rental companies such as Diamondlease and Fast Rent A Car UAE have started offering lease-to-own options this year. Another development is the introduction of car dealers providing their own financing for buyers. Al Fahim Group, the holding company behind Mercedes-Benz dealers in Abu Dhabi, said last month it planned to provide its own financing this year to help buyers. Sales of the luxury car have dropped about 20 per cent in the first quarter, which the company has blamed on banks not extending credit. Despite the problems of getting a loan, buying a car these days is not such a bad idea. Sales are down and dealers are struggling. Promotions and deals are around and sellers are more receptive to hearing counter offers from customers, especially given the hundreds, if not thousands, of seized and abandoned cars on the market. [e-mail]