🚗 Car Loans: Driving home for Christmas?

Probably not. But you may be thinking of buying yourself a new set of wheels.

Cars are best bought paying cash, but car loans (or auto loans) are the next best thing. As with most things in the UAE, the process of getting a car loan has its quirks so we'll explain it step by step below.

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Car loans vs. car finance

These are the two main forms of finance available when you're buying a car:

• Car loan - With a car loan, you become the owner of the car. To do that, you pay the deposit to the dealer and the bank covers the rest. You repay the loan to the bank in monthly instalments over the agreed duration of the loan (usually 2-5 years). The bank is listed on the car's registration as the "mortgage" provider, i.e. they have a claim to the car should you stop paying off your loan.

• Car lease/finance - Mainly available on new cars or some pre-owned cars from the dealership. Under this agreement, the dealership remains the owner of the car and grants you the right to use the car in exchange for monthly payments. You will have an agreed annual mileage limit but all maintenance and often insurance is included in the deal. At the end of the financing period (usually 2-3 years) you have the option to buy the vehicle. However, bear in mind that you will be offered a take-it-or-leave-it price from the dealership, which is often above the market value of the car.

Each of the options has its pros and cons. Car finance tends to be the hassle-free approach, although with a reliable car that doesn't need much maintenance it is usually less value for money (the exception are manufacturers that offer 0% finance deals as promotions).

With a car loan, you end up owning the car outright at market value, which may be a good asset to hold. They are slightly more complex to obtain though, so we'll focus the rest of this article on them.

Where do I get a car loan from?

You may be forgiven for thinking you could approach any UAE bank that offers car loans and get one for your chosen car. That's not true though. Dealerships (whether car manufacturers or used car dealers) have agreements in place with a number of banks (they call them listed banks) and only they can provide a car loan for a car from that dealership.

Make sure to insist that the dealer goes out to at least 2-3 of their listed banks and obtains quotes as the interest rate offered will vary. Otherwise, the dealer will likely choose the bank they have the best relationship with / offers them the best kickbacks.

Understanding car loan interest

In the UAE, you will see two ways in which car loan interest is quoted:

1. Flat rate - this is the rate you will most commonly find advertised and is lower of the two rates. It applies the flat % annual interest rate to the full loan amount for each of the loan years, therefore not considering any repayments.

2. Reducing balance rate (sometimes "real rate") - more commonly used and known internationally. As you repay your loan, with each instalment the balance reduces and this rate is applied to the remainder. To arrive at (roughly) this rate, you need to multiply the flat rate by 1.9x (or ask the bank to quote using a reducing balance basis).

How much deposit do you need?

The standard deposit is 20% of the car's value. You may choose to increase that, therefore lowering your monthly repayments and the amount of interest you pay overall.

As the deposit is payable to the dealer, you can usually pay on your favourite credit card and get cashback or miles/points on that transaction. Make sure you have enough money to pay off the card in full the following month or you will be hit with hefty credit card interest.

Monthly car loan repayments

Your monthly repayments are listed in your loan agreement. They are automatically collected from your account on the day you agree with the bank. Most banks will insist on collecting repayments straight from your salary account.

"Promotions" with strings attached

• Low headline rates - low advertised rates usually are specifically for UAE nationals and new car purchases only, expats buying a used car will have higher rates applied.

• Delayed repayment options (e.g. pay nothing until 2025) - this extends the duration of the loan and increases monthly repayments once you start paying.

• 0% deposit - in practice, the bank provides another loan for the 20% deposit, so again, you end up repaying two loans and more money over time.

What documents are required?

The majority of the process with the bank and the car's registration should be handled by the dealer. However, the bank will usually require the following documents from you:

• Emirates ID

• Salary certificate from your employer

• 3 months' bank statements / payslips (some banks)

• Signed car loan agreement

• Cheque for the total loan value as security (only some banks)

What to be mindful of

• Obtaining best quotes - Ask the dealer to source quotes from multiple banks as the offered interest rates will vary.

• Added "extras" from the dealer - The dealer will offer to include extra items in the loan (such as maintenance contracts, extended warranties, window tints, and insurance). Whilst you need to consider value for money for maintenance and warranty, other items such as tints and insurance you can almost always get better & cheaper elsewhere.

• Early termination fees - Should you want to repay your loan early (for example when you decide to sell the car), you will have to pay ca. 1% of the outstanding loan value at a time.

• Arrangement fees - These are standard for car loans in the UAE and are also usually in the region of 1% of the car value so do factor these into your budget.

Safe driving everyone!

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Disclaimer: Please bear in mind that this email does not constitute financial advice. Any choices you make you are solely responsible for. We always aim to provide highest quality, independent views but do your own research to ensure you’re comfortable with any changes you make to your personal finances.