There will always be people who say cash is king. “Don’t bother about taking a car loan if you have cash ready in the bank, my colleagues told me,” says Carlo Avelon, a 3D computer design specialist who recently arrived from the Philippines to take up a post in Dubai Media City. To reach his office, he needs a car, he says. “I was thinking of buying a small one straightaway with the money I saved from my earlier job.”
But then Avelon found that car loans in the UAE are currently offered at flat interest rates as low as 1.49 per cent, with repayment periods that matched his planned duration of stay in Dubai of a maximum of six years.
Looking at investment options back home, he found that if he bought, for example, government bonds over the same period, he could enjoy safe yields of around 3.5 per cent for medium-term notes when held until maturity.
Loan advantage
“I thought when I buy these bonds and redeem them at maturity to repay the loan principal, when I return home I’ll have a gain,” says Avelon. “If I used my cash to buy a car in Dubai, I’d actually lose money.”
He eventually decided to buy a new Toyota Yaris with vehicle finance from Al Hilal Bank, which currently has a 2.35 per cent flat rate for his salary bracket above Dh20,000, an upfront fee of only Dh650 and no early settlement fee. The requirement of 20 per cent down payment for the car (all conventional car loans require a down payment) is still a better deal than buying it in cash, and Avelon absorbed it as part of his anticipated settlement costs.
“[Choosing] cash or loan depends entirely on one’s circumstances,” says Ambareen Musa, Founder and CEO of price comparison website Souqalmal.com. “If the cash is earning interest at a higher rate than the rate of a car loan, it makes sense. The interest on the cash would then be paying off the interest on a car loan.” She adds that shopping around for a car loan pays off.
For zero per cent deals on car financing, Ramadan is the best time to shop around. Volkswagen, Audi, Nissan and even Porsche are well known for their generous interest-free offers for selected models during th eholy month. Leading banks in the UAE also come up with competitive interest rate schemes to lure in buyers. Emirates NBD currently has a number of limited zero per cent finance offers. Mashreq offers a zero per cent interest/profit rate on selected GMC and Chevrolet 4WD models. Although the zero per cent schemes are often limited to three years, they are still a great deal.
A car loan is not just a facility for people who lack the liquidity to buy a car in cash but also an instrument to manage personal finances. Comparison portals such as Souqamal and Bayzat.com show that there are a high number of car loans for a great variety of customer types, distinguished by minimum salary, maximum finance amount, arrangement fees, flat or reducing interest rates, included discounts for car insurance and other features.
Associated perks
What most of the loans have in common is that down payment is usually 20 per cent and the repayment period rarely exceeds five years. It pays to be on the lookout for great offers before signing a sales contract with a car dealer. For example, auto loans at Commercial Bank of Dubai come with incentives such as free insurance and reward points. “Such promotions allow our customers to budget their spending for the year,” says Murray Sims, General Manager — Personal Banking Group at Commercial Bank of Dubai. “For our personal finance products, we offer some of the most competitive interest rates in the market that remain fixed for the loan’s entire term.”
Is this the right time to go for a car loan? You might think that even if you do not secure a zero per cent finance deal during Ramadan, you still can draw on a 2.25 per cent loan later. However, it seems that such offers won’t last much longer. Interest rates will gradually rise in dollar-pegged markets such as the GCC when the US Fed takes action as expected in the second half of this year to end its quantitative easing programme.
Moreover, cars imported from Europe are now 10-15 per cent cheaper in dollar terms than a year ago, as a result of the drop in the euro, provided dealers in the UAE pass savings on to customers.
Lastly, car loans have been one of the fastest-growing product groups in the country’s consumer finance sector, resulting in fierce competition, razor-sharp margins for lenders and a rising number of defaults. Because this isn’t sustainable, rates and terms are likely to be adjusted in the future.
