Be Aware of the Low Interest Rates on Car Loans
Since I did receive lot of enquiries on this I just thought of putting it in forum.
Banks in the gulf region give a flat rate of interest which works to around 2.5-5% interest. You will always see car dealers advertise really low rates of interest on your car loans. However If you calculate the EMI (equal monthly installments) by reducing balance method, the actual rate of interest works out to 8% - 11%.
The additional demerit of this using the flat rate method is that the initial installments (EMI) go towards only the interest component of the loan and not the capital. People realize this when they have to sell of their cars here within a year or so and their balance on loan is almost their initial capital component amount.
To further elaborate on the above
INTEREST CALCULATION A FLAT RATE - THIS IS THE METHOD BANKS USE IN THE GULF
Suppose you took a QR 100,000 loan today at a rate of interest of 10 per cent for five years. You are to pay back QR 20,000 of the principal and QR 10,000 (10 per cent of the loan) every year. So you pay back QR 30,000 every year. Over five years you pay back QR 150,000. But notice, that the loan kept reducing over the five years as you paid back QR 20,000 each year, yet you went on paying interest for five years, as if you had kept the QR 100,000 for the entire term.
INTEREST CALCULATION ON REDUCING BALANCE
What if you paid an interest ONLY ON the amount you owed each year and not the entire one QR 100,000?
The first year you would pay QR 10,000 as interest, the next year you would pay QR 8,000 on a reduced principal of QR 80,000 and so on, till the last year, you pay only QR 2,000 as interest. Now you would have paid back QR 130,000 instead of QR 150,000 as in the earlier case.
The first case is a situation of a loan that charges interest at a FLAT RATE (your car loans in the gulf) and the second case is when the interest is calculated on a ‘reducing balance’ or only on the amount of loan left to pay and not the entire loan amount.
You should get a range of options in reducing balance loans. You get annual, quarterly, monthly, weekly and now daily rests. A ‘rest’ is jargon to indicate when the bank will recalculate the EMI based on the amount of loan paid back. Suppose you have a loan with an annual ‘rest’ then, though you pay a monthly instalment, your benefit kicks in only at year end. Meaning the bank gets free interest for 11 months. A monthly ‘rest’ will recognise the reduction in the loan amount on a monthly basis and a daily ‘rest’ will do it each day.
Hope this is all clear now else just forget it and be content that you are getting a 3.99% interest loan - hehe :-)
im agree with iwael said u most now what is the full amount after the insurence and all tax then u will now what u will get and what u will payback!!
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curt
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a new car,,always get one at least one year old....otherwise you suffer all of the depreciation.
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hi there..may i add something or further abt sir r lasrado explanation...following the flat rate sir that you mentioned..if a banks says 10% for five years... it should mean 10% for the entire 5-year term of the loan...so its an add-on rate...not a flat rate.......so the computation would be 100K less any downpayment and/or discounts from the dealer if there would be any.. the difference is the amount to be financed by the bank...and is the one subject to the 10% add-on rate...its entirely different from 10% per year flat rate... But it is surely better to consult the bank clearly before signing up to a loan. Under the add-on rate scenario, you spread the amount financed equally for the entire term..( in months)..plus the add on rate of 10% of the amount financed similarly spread for the number of months...then you get your EMI or EMA..equal monthly amortization.
Now,
Do not take car loans, just pay your car cash. Dealers are having difficulties making their quotas and are giving extremely low prices.
taking a loan in unstable times, I wonder how wise that is.
very informative...must be updated....
you possibly can, pay cash. You can probably negotiate a discount on the price.
I beleive that the flat rate is not accurate as you mentioned, but the EMI is not up to 11%.
I have expereince with the Qatar Islamic Bank, which announced the rate of 4.12% for the first year. I have purchased the car through them and at the end it's 5.8%, which I consider a ver attractive rate . In additition to that the car is in my name TOTALLY . I don't have to wait till the payment is complete.
They have finished the documents in 15 minutes and every thing is wonderful.
At the same time I have visited the QNB for the same purpose, that claimed that they offer 3.99% and after calculations, it was 8.5%.
I advise everyone to calculate the actual amount he/she pays and see what is the real rate.
good luck everyone.
rlasrado - Hey You Financial consultant what r the alternatives available except paying the full amount in cash.:)
Dude....nice n quite informative....
where in hell did u get the time to think like this???
Great stuff!!!!
ru still lookin??