Financing is the first and foremost concern of customers while buying a new car. For most people, buying a new car has a significant impact on their savings and future spending. Riding an expensive car is certainly a pleasurable experience and the best way to finance it is through your own available resources. With that said, not everyone is financially stable. This is when you have to take assistance of a financial institution and get a car loan.
Here are some tips that can help you reduce your financial burden.
Car Financing in GCC Countries
In Gulf, most banks are ready to provide you auto loans on easy installments. For instance, in the UAE, you can take a car loan of maximum AED 1,000,000 at a minimum interest rate of 2.25%. The standard minimum down payment across the country is 20%, while the maximum repay period is 5 years. However, you must be earning minimum AED 3,000 to be eligible for the financing. Please note that the interest rate, maximum loan amount and minimum salary may vary from bank to bank.
Once you have decided to take bank’s assistance to finance your next car, try to cut the cost as much as you could. Following are a few tips to reduce interest premium on your car loan.
Choose an Economical Car for Car Loan
The interest amount charged by the bank primarily depends on the principal amount, which in this case is the vehicle’s price. Assume a situation where you have the option to choose from two different models, let’s say Hyundai i20 and Ford Fiesta. The base price of i20 is AED, 42,900, while for Fiesta it is around AED 65,000. Considering 20% down payment, here is the difference of interest amount you would pay over the period of five years.
| HYUNDAI i20 | FORD FIESTA | |
| Price | 42,900 | 65,000 |
| Interest Rate | 3.00% | 3.00% |
| Repay Period | 5 YEARS | 5 YEARS |
| Down Payment | 8,580 | 13,000 |
| Loan Amount | 34,320 | 52,000 |
| Interest per Year | 1,030 | 1,560 |
| Interest – 5 Years | 5,150 | 7,800 |
In the example given above, the difference between two interest amounts is AED 2,650. This implies, you should evaluate different vehicles in the same segment and choose a reasonably priced car.
Increase the Down Payment
Another factor influencing the interest amount is the initial down payment. The down payment is the upfront payment the consumer disburses for their new car. As we subtract the down payment from car price, we get the amount that will be paid by the bank. To explain the impact of down payment, let’s carry forward the above example.
| 20% DOWN PAYMENT | 30% DOWN PAYMENT | |
| Hyundai i20 Price | 42,900 | 42,900 |
| Interest Rate | 3.00% | 3.00% |
| Repay Period | 5 YEARS | 5 YEARS |
| Down Payment | 8,580 | 12,870 |
| Loan Amount | 34,320 | 30,030 |
| Interest per Year | 1,030 | 901 |
| Interest – 5 Years | 5,150 | 4,505 |
In the above illustration, you can see that increasing the down payment by 10% reduces the interest amount by AED 1,355.
Reduce the Repay Period
Every bank charges interest on per annum basis, which means, reducing the number of years would simultaneously decrease the amount of interest you pay. See the table below to know how it works.
| 5 YEARS | 3 YEARS | |
| Hyundai i20 Price | 42,900 | 42,900 |
| Interest Rate | 3.00% | 3.00% |
| Repay Period | 5 YEARS | 3 YEARS |
| Down Payment – 20% | 8,580 | 8,580 |
| Loan Amount | 34,320 | 34,320 |
| Interest per Year | 1,030 | 1,030 |
| Interest – | 5,150 | 3,090 |
This demonstrates that the overall interest reduces by AED 2,050, if you repay your loan in 3 years instead of 5 years.
Consider all the factors we have discussed above to lessen your financial burden.