Guide to car loans

Take your time choosing a car loan and do your research – it’s a big purchase and the car loan you decide on will determine how much you pay for months or years to come. And it’s not as simple as just picking the cheapest rate – which may mean transferring your salary to that bank or earning a certain minimum salary. [Related: Why shopping around for a car loan pays off]
Firstly, decide how much you want to borrow for your car and the length of the loan period before you begin your search. Then remember to watch out fees, such as early settlement and upfront fees – both typically one percent – and note you will get a better profit rate and loan amount if your salary transfers into the bank.
[Compare Car Finance in the UAE | Compare Car Finance in Saudi Arabia]
Finally, look out for any added extras such as free car insurance with the loan, extended warranties or free traffic registration.

What should you know when comparing car loans?

1. New or used

Once you decide whether you are buying a brand-new car from the showroom or a secondhand car, you probably will need to finance the car. You can filter your search results on Souqalmal.com to only look for financing for new or secondhand vehicles.
[Related: Should I buy new or secondhand? | Buying a new car in Dubai]

2. Down payment

Make sure you can afford the down payment, it’s a requirement by law and varies based on these factors:

• Are you buying new or used?
• Are you going to transfer your salary to the bank that will be providing you the car loan? (i.e will your salary be deposited from your employer to the bank in question?)
• Is it an Islamic product? An Ijarah, which is an Islamic car finance product does not require any downpayment to be made as it is considered as a lease to you and transferred to your ownership at the end of the term.

3. Minimum salary requirement

There is always a minimum salary criteria set by banks on new or used car loans – make sure you meet the requirement for any loan you’re interested in.

4. Arrangement fee

Arrangement fees or upfront fees are what a bank would typically charge you at the beginning of the loan as a processing cost – that is, after you have accepted the car loan. You will have the option to roll the fee into your principal car loan amount or pay it upfront.

5. Early settlement fee

If you take a car loan for five years and then decide to pay if off earlier, most banks will charge a fee to settle the loan, typically around one percent or more. Sometimes, they have offers for no early settlement fees – but check carefully whether this is applicable for cases where you refinance with another bank as well as if you settle the loan fully in cash.

6. Flat vs reducing rates

There are two ways of calculation of the rate on the car loans that you see advertised by providers – as a reducing rate or as a flat rate – so make sure you ask the bank what type of rate is being quoted. A reducing rate means it is the percentage you pay on your outstanding balance of your car loan whereas a flat is the percentage of you pay on the principal amount of your car loan throughout the term. So a loan at a reducing rate of eight percent is exactly the same as a loan at a flat rate of 4.41 percent (the general rule is you divide reducing by 1.813 to get the equivalent flat rate). So be careful when you compare rates, as one bank may be advertising a reducing rate loan and the other a flat rate loan. If you want more details about how these are calculated, you can read our guide to reducing vs flat rate.

7. Salary transfer

While transferring your salary to a bank to get a car loan is not necessary for all loans,it might mean you get a better rate. The bank will consider a customer with a salary transfer less risky and therefore will generally offer them a lower rate.

8. Islamic or conventional?

If you are looking to finance your car with an Islamic product, you need to search for only products that are sharia-compliant. Make sure you ask your bank whether they offer Islamic financing.
You may not even be sure if you definitely want a car loan or car finance. If so it’s worth reading Buying a car: Cash or loan?
Many people have Islamic car finance without realizing it – but what is the difference between Islamic and conventional vehicle finance and how does that affect the consumer? Find out in our guide to Islamic car finance.
Like all loans, make sure you do your homework and compare all the Islamic car finance available.

9. Self-employed

In the UAE the self-employed – including professionals such as doctors – can find it harder to get a car loan as they do not have a fixed income per month. There are still car loans available for the self-employed but they may have higher rates or lower ceiling limits or tenures so do shop around.