If you live and work in the UAE, having a car is something of necessity for many people – despite greatly improved public transport options now available. But deciding on how to finance your car is no easy decision.
Buying a car is probably one of the most expensive things you’ll ever purchase (aside from a house). So when it comes down to it, what is the best way to finance your car?
Here are several options broken down for you.
This is probably the most popular option when it comes to buying a car. It certainly offers convenience, given you’re unlikely to have the spare cash lying around to buy a car outright. And if you decide to use a loan to finance your new car, that usually means that you can afford a better model than if you were buying a car with cash. For example, instead of paying AED 8,000 for a used car in cash, you can use the same amount of money as a down payment for your loan, and then use the loan tenure to pay off the bill on something much better.
But it’s worth understanding how auto loans work in the UAE. Unlike a personal loan, an auto loan is actually classed as ‘good debt’; the car is classed as an investment so the loan doesn’t affect your credit score – it actually improves it (if you keep on top of your monthly payments, of course). So, you may want to consider using an auto loan if you have good credit score. You’ll be able to access lower interest rates.
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But it is a loan, and like any loan you need to make sure you do your research beforehand and shop around for the best rate. Find a loan that works well for your finances, and don’t forget about all the extra costs that might come with having a car – you may have to shell out a lot of extra cash for serving costs, particularly if you’re buying a second-hand luxury car.
You could argue that this is the cheapest way to finance a car. Just like when you buy a book over the counter with money, the exchange is hassle-free and the purchase is immediate. Paying for your car in cash eliminates the need to worry about interest rates, late fees or other issues that could occur later on. You don’t have to dip into your savings or emergency fund to finance your purchase. You also don’t need to worry about your credit score or history, as the dealer doesn’t need that information. If you want to treat yourself then it could make sense to save up for a car and buy it only when you can truly afford it.
And that may make more sense that you might think. If you have cash in an account not earning enough interest, paying cash for a car could be the best option. After all, cash not earning interest is useless. You could put the cash to good use by avoiding using a car loan and paying interest.
Here’s how you can work out if paying cash is preferable to takin out a loan. If you have a car loan for AED 50,000 with a flat rate at 3.46% per annum over five years, you could end up paying nearly AED 4,000 in interest over the loan tenure.
If you have AED 50,000 in cash, sitting in a savings account, and it’s earning interest at a higher rate than the rate of your car loan, it makes more sense to keep the cash earning the higher rate and take a car loan at a lower rate (at certain times of the year, 0% interest rate loans are available). However, if the interest you’re earning is lower than the interest you’ll get on a car loan, it makes more sense to pay for a car with cash.
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All of that said, if you prefer having a safety net readily available and spending the majority of your savings for a new car makes you anxious, then it’s best to avoid using your cash to buy a car outright.
The idea of leasing a car may not seem financially smart – spending money each month on a car that doesn’t even belong to you isn’t exactly an attractive proposition on the face of it. But it could make more sense than you think.
Leasing a car firstly makes more sense if you don’t see yourself living in the country for a long period of time. Car loans can last up to five years, so if you want to live in the UAE for less than five years, then hiring a car makes better sense for your finances.
When hiring a car, most companies charge you on how many kilometres you have driven – depending on your lease agreement. You’ll probably have to pay extra for each kilometre, meaning leasing isn’t great for heavy drivers. But if you purely want a car to get you from A to B and don’t rack up many miles, then hiring a car could end up saving you more money in the long run.
Plus, there’s no down payment – just a small deposit to pay at the beginning of the lease. Monthly payments do tend to be higher than if you were repaying a loan, but with a lease, you don’t need to worry about depreciation, servicing, or insurance or registration.
That said, if you’re prone to getting scratches on your car having the kids damage it, a lease may not be for you because of the wear-and-tear fees that comes with hire cars. Wear and tear fees vary and again depend on your agreement.
So, what’s the bottom line?
The reality is that buying a car is almost always cheaper in the long run. Once you’ve done all the calculations, the longer you own the car, usually the more you save by buying. If you have good credit history then borrowing money to buy a car could be cheaper, but if you have plenty of savings then using your money as an investment could prove better for your finances.
The choice between taking a loan or putting up the full cash amount when buying a car is an individual choice and depends on your circumstances. Make sure you calculate the full cost of owning, especially factor in the price of insurance and always shop around for the best deals.