Guide: Car financing

Everything you need to know about car financing

Investing in a car is a big deal. You need to make sure you can pay for it, pay for insurance, you should always make sure you know a Duluth Injury Attorney should you get injured in an accident and then have money saved in case anything breaks down. What about making sure your car gets the right maintainence? That could cost you a bit of money as well. That’s why it’s so important to make sure you have enough saved for it, just in case something does happen. If something like this does happen to you though then you may want to check out a company like blackwood, southwales to help sort your car out. So, how are people paying for this? What’s the best way for you? Car financing is used more often nowadays than most people think. Meanwhile a vehicle is not solely a status symbol anymore but a tool many people depend on for business and private reasons. In 2015 about 2.5 million cars were driving across the UAE, which corresponds to about a third of its inhabitants. However, car financing has to be done carefully. There are different versions and all of them have certain advantages and disadvantages. We differentiate between three different types of car financing: financing via leasing, using a loan, and three-way-financing. Different portals and car loan calculators offer possibilities of comparison, so that you can find the most suitable method for yourself and your current situation.

Car financing: leasing, loan or 3-way?
For many people lease-financing is a common and well-known term. Using this method, the leasing rate to be paid is determined for a certain period. However, you as the lessee are not the owner of the car, but merely operator while you enjoy the right of use. There are many advantages and disadvantages with this kind of the financing. Thus, the rates for a leased car are tax-deductible as company expenses in many countries, where they have income tax. The leasing-object is also not mentioned on the balance sheet of the lessee, only the rates are registered in the profit and loss calculation as company expenses. Furthermore the leasing-rate can be considered an unchanging constant factor, which adds to the safety of the own budget.

The car loan is a regular loan with instalments, during which the vehicle registration document is used as a chattel mortgage at your financing bank. The bank is also the owner of the car until all dues are paid. The advantage is that a car loan is paid in full to you, which means you can get cash discounts at the car dealers.

Three-way-financing is a mixture of leasing and car loan. The loan is split three ways: optional down payment, monthly instalments and one final instalment, sometimes referred to as “balloon”. The difference between leasing and this option is, that when using three-way-financing you become the owner of your car and have more than just the mere right to use it.

What you need to consider regarding car financing

It depends severely on individual factors, which kind of car financing will be the right one for you. A reliable loan calculator as well as a loan comparison shall be used in any case. You should not only look at the individual instalments but at the real costs in total. Loan calculators offer a good overview of currently existing interest rates, which are offered during car financing and show you the differences, which can be a few hundred dollars or thousand dollars. A credit comparison is recommended and worthwhile.

If you agreed on a down payment, this will be approximately 20% of the retail price. When reselling a used car the resale value is calculated with an expected loss of value of 1.8 % per month. The exact residual value of a car can be determined by experts for free at SellCarGetCash.com. There are also independent several banks, such as Emirates NBD, NBAD, ADCB or HSBC, which have motor financing divisions helping you finance cars of all brands. There are also banks, which are owned by car dealers, such as Al Futtaim Finance, who are dealers of Toyota, Lexus or Honda in the UAE. They are helpful, in case you decide to buy a specific car brand.

Tips and advice regarding car financing

There are certain factors regarding car financing which always have to be considered so that you will not have any disadvantages later on. Therefore, you should ask yourself, if it is necessary to take a loan and if you can pay the monthly instalments. The instalments should never be higher than 15% of your net household income, as otherwise financial issues are more than likely to arise. When your bank does not accommodate you with money, you should start considering your financial situation. Banks are always profit-oriented companies who in this case consider a customer as a losing bargain, therefore stabilising own finances is more meaningful than further indebtedness.

Avoid financial intermediary and do credit comparisons on your own. Intermediaries ask for high commissions, which mean additional costs for you, which are often added to the instalments of your loan. Therefore, compare as many banks and their prices as possible. Don’t be fooled by low monthly instalments, rather ask for possible extra costs. Extra costs normally include what was omitted in the instalments, including interest. In each instance be honest about the particulars you furnish, as wrong information may lead to legal consequences during payment issues.

Can a car be sold during financing?

The answer to this question is “yes”, a car can be sold during financing. However it needs to be ransomed at the bank, which financed it, first. This can be done independently or through a reputable buyer or car dealer. If the purchase price is lower than the remaining instalments, you as the financial partner of the bank, have to cover the difference. – Unless the buyer is willing to do so. Besides such professional and free of charge transactions, you can also level the playing-field fast by contacting the financing bank and ask for the total outstanding amount (ask for a “liability letter”). In case of doubt you can also create a pre-contract which becomes valid only when the bank agrees to it. In general you need the permission of the bank to sell a financed car. Normally you will be granted this permission without any issues once you have found a suitable car dealer who is willing to buy your used car. The money you will make during this car sale is transferred directly to your bank by the dealer. This way the residual debt of the financing can be covered. If the residual value is higher than the residual debt, the difference will be given to you, the seller.

When should you sell a financed car?

There are different factors influencing the moment of selling a financed car. Normally a car is prone to constant deterioration. Amongst others because of successors being released or because of general wear. As every car is as individually as its driver it is hard to derive general rules. However there are some details you can consider which speak in favour of or against selling the car. Attached are the following considerations:

1. The age of the vehicle – How was it used?

The mileage of a car is a major aspect when asking for loss of value. The more you drove it the more damage it most likely having. Also when and where you drove does matter. Driving through winter scenery with its thawing salt and grit or challenging off-road tours demand a lot more from your car than just driving to the mall or using it for the short trips to work.

2. The condition of the vehicle – How high are repair costs?

From time to time, a car has to be repair and repairs do cost money. Add up how much you spent on repairs over the last two years and then compare this value with the residual value of your car. In case it is lower, you should seriously think about selling it to avoid further losses.

3. The current car market – How much will I get at a car dealer?

It is never wrong to square and test the market. Keep your eyes open, if there currently is a fair offer for you at your local car dealer, which may be financially interesting for you. For example, you can get a professional and free car evaluation at SellCarGetCash.com and afterwards compare if selling your car may be a worthwhile deal for you.

By the way:

When granting a loan most banks ask for an administrative charge between 1 and 3.5 %. Officially, this is done to determine your solvency, but many courts have already de-legalized it, but banks still try to enforce hidden fees.

Car leasing:

Car leasing affairs

Car leasing is an option for everyone who needs a new car but doesn’t want to buy or finance one. Unlike a car purchase, car leasing can be viable for some drivers. Instead of paying off debts at your bank for years, you only have to pay monthly “rent”” and do not have to worry about selling the car later on. This version of car ownership is getting more and more popular. Car leasing is a financial service requiring a specific license. Leasing is easier than getting a loan at your bank. Car leasing however is not always a worthwhile bargain for private people. Our guide will explain all advantages and disadvantages of this method to you; we will compare it with the idea of buying vs leasing– financing and car purchase and look at special circumstances, such as leasing a used car or leasing without down payments.

How does car leasing work?

Car leasing means that interested people can rent a car for a previously agreed period. The car, in most of the cases a new car, is used by the lessee but remains the property of the lessor. He charges fees for the usage of the car, either once or on a regular basis. After the customer has decided on a car, he has to find a provider who offers the car he is interested in for leasing. This is possible at independent leasing companies, manufacturer companies or car dealers. Financing conditions depend on the provider: Some require monthly payments, others only ask for a payment at the beginning and at the end of the leasing period. When closing the contract other requirements can be considered as well. Often a kilometre limit is set, which required additional payments when exceeded. Furthermore, the residual value is calculated.

In case the residual value is too high, the lessee has to pay the difference between this value and the actual value. Please consider, in this case the calculated residual value is not the same as the purchase price of the car. When the contract expires, the car is returned to its legal owner and can be, renewed or the car may be purchased by paying the residual valued, depending on the business partner and negotiations. Car leasing contracts can only be cancelled for serious causes, e.g. emigration or theft. As long as the lessee is using the car he also has to pay for maintenance, repairs and insurance.

Advantages and disadvantages of car leasing

The major advantage of car leasing is that you can drive a new car for a limited period and then you can return it before typical used car maintenance costs arise. At the end of the contract you do not have to find a new buyer, so there is no need for advertising and acquisition searching either. Especially for the commercial sector, freelancers and companies, car leasing is a popular investment. The costs are tax-deductible (in the UAE there are no taxes for this, so it does not become an advantage here), therefore reducing the payments made to the finance authorities. For private citizens the low instalments are an advantageous kind of financing. You also will always drive the latest brands and models.

But a lot of lessees tend to forget: The low instalments refer to the usage, not the car itself. Car leasing therefore does not mean that you can buy the car afterwards. Even if you don’t use the vehicle, the instalments will be due – if it was your own car you could sell it in this situation, but it is almost impossible to cancel a leasing contract prematurely. If the leased car is stolen or involved in an accident, the insurance company will only cover the fair value of the car, but not the value demanded by the leasing company. The lessee has to cover a possible difference himself. Furthermore, there may be additional payments the lessee has to cover, in case not all requirements are met at the end of the contract, e.g. exceeding the kilometre limit.

Advantages

• low maintenance costs
• no sale necessary
• when used commercially: completely tax-deductible
• low monthly instalments

Disadvantages

• no car ownership
• contract hard to cancel
• instalments are due, even when the car is not used
• eventually high additional payments, when kilometre limit was exceeded

Used car – leasing reasonable?

In general, car leasing is only concluded with new cars. Even if this option of car renting is possible for used cars, it is seldom used. Often there are higher maintenance costs for a used vehicle than for a new one. As the lessee has to raise the money for these fees himself, car leasing, as seen from a financial aspect, is less suitable for used cars. When omitting this risk however car leasing can be rewarding: The monthly instalments are most likely lower than when leasing a new car.

Car leasing without down payment

Meanwhile quite a few providers offer car leasing without down payments. That means that you do not have to advance money when entering into the contract in order to lease the car. Mostly the amounts range between 5,000 and 40,000 Dirhams, depending on manufacturer and model. At first view, leasing without down payment sounds very lucrative but people interested in this option should keep in mind that the omitted down payment are added to the instalments.

Car leasing, financing or direct car purchase?

The difference between car leasing and financing is the purchase: Though you are paying monthly instalments in both cases, you are only the user of the car when car leasing, but when financing, the car owner. Therefore, when you are intending to buy the car even before planning car leasing, you are better off organizing a car purchase via financing right from the start. Because during car leasing the car purchase at the end of the leasing time, will be at an excessive price, if purchase is at all possible. So there definitely is a financial advantage when using financing. One of the advantages of car leasing is that unlike during financing and car purchase, there is no essential market risk. Even if the model loses value on the automobile market, this will not have any influence on the user, but on the owner. The ladder may do money-losing business, all values are constant for the lessee, he just has to take care of arising repairs.