Any recent resident in the UAE knows that settling here involves several hefty costs. For starters, rent is paid up-front for the entire year in advance which leaves many with little to spare. Meanwhile, the cost of financing is relatively low (2-4% versus more than 5% in other markets) with several banks competing over loan seekers. These two factors combined have made car financing quite prevalent in the UAE and we see as high as 60-70% of car buyers looking for, or open, to a car loan. With all this demand, we at CarSwitch.com thought it certainly worthwhile discussing the process of getting a used car loan.
Let’s first figure out how big of a car loan you can take. UAE banks have a minimum eligibility criteria on getting a loan for a used car. Some of these requirements are mandated by the Central Bank to avoid the delinquencies faced during the 2008 recession, and others vary according to the bank’s policies and risk management approach. Below are some general guidelines:
1) Up to 60 months: Loans for the financing of used cars have a tenure of up to a maximum of 60 months (5 years). However, the maximum tenure of a loan can be shorter for older used cars. For example, some banks require for the used car to be no older than 10 years upon completion of the loan. As a result, a 2010 year model cannot be financed for more than 2 years starting in 2018.
2) 20% down payment: Consumers can only finance 80% of the used car’s value, which implies a 20% downpayment. The downpayment is generally paid directly to the bank, which then in turn settles the full value of the used car with its owner. However, a few banks in the UAE ask the used car buyer to settle the 20% down payment directly with the seller after which the bank will settle the remaining 80% of the value of the car with the seller.
3) At least 25,000 AED: Many banks will have a minimum loan value they are willing to finance which is generally around 20,000 AED. Since banks finance 80% of the car’s value, this means a minimum car value of 25,000 AED is required for the car to qualify for financing (that is 80% of 25,000 AED which yields a 20,000 AED loan).
4) EMI must be less than 50% of salary less liabilities (including credit cards): The resulting Equal Monthly Installments (EMI) of your used car loan cannot be greater than half your salary less existing liabilities. So if you make 10,000 AED a month, your resulting car loan monthly installments cannot be greater than 5,000 AED a month. If you already have any other loan and you are paying off say 1,000 AED a month, then your new loan monthly installment cannot be more than 4,000 AED and so on. If you have credit cards, then generally 5% of your credit card limit counts towards your existing liabilities.
The guidelines above can help you calculate how much car loan you can get. Start off with half of your monthly salary and subtract any existing monthly installments that you already pay. Then subtract 5% of all your credit card limits. This will tell you the maximum monthly car loan installment you are eligible for. If you multiply this by 60 months, it will tell you the approximate car value you can go for. Reduce it by 3-4% to account for the interest that the bank would charge you. Now that you know the numbers, lets see what is required to actually apply
a) You can go to ANY bank: A big plus in the UAE is that it doesn’t matter which bank your monthly salary goes to. You can apply for a loan from any bank in the UAE. This is a big advantage as it allows you to shop around to seek the lowest interest rates. Of course, your bank may provide you a special rate to keep you banking with them, but asking around can help
b) Three months salary transfer: Most banks will require proof that you have received three months of salary into a bank account to validate your recurring income. They will typically ask you for a salary certificate from your employer, and stamped bank statements displaying the transfer. For self-employed consumers, the process is a bit more involved.
c) Valuation certificate: All banks will require a valuation certificate from one of their authorized valuators to confirm that the value of the car you are buying is roughly in line with what the bank believes the car is worth. Many banks can provide you with an approval before producing a valuation certificate so you can verify beforehand if you are eligible for a loan, which can help you avoid the trouble and an added cost of 300-500 AED.
d) Clean bill of record: Depending on your financial history, additional documents may be requested. If for example your salary transfers are inconsistent from month to month or there is history of a bounced check or late credit card payments, then further evidence of your financial stability may be required or the loan may not be approved.
Once the documents are submitted, banks will go through a credit check and approval process of your applications. This includes reviewing your financial history and potentially verifying your employment through a phone call to your employer or a site visit. If all goes well, you will get approved for the loan!
Next you need to know what needs to be done to get the car transferred to your ownership.
a) Comprehensive insurance: The used car you are purchasing is the underlying asset of the loan and so the bank must ensure it is well protected. Accordingly, they will require you to take a comprehensive insurance policy against it and third party insurance is not sufficient. The insurance policy must name the bank as the co-beneficiary.
b) Bank LPO: The bank will provide you with a Local Purchase Order (LPO) in the seller’s name, which is a guarantee that the bank will pay the seller the finance amount once the proof of ownership transfer and comprehensive insurance is provided.
c) Transfer ownership: You are now set to proceed to an RTA authorized center with the seller to transfer ownership of the vehicle (check here for a full list of requirements). Once completed you need to provide the bank with the new car registration card (Mulkiya) proving that the car has been transferred to your name along with a copy of the insurance policy. With this the bank will produce a check in the sellers name over the following week.
d) The car is mortgaged: At this point the new car registration card will indicate that the car is mortgaged to the bank. The new car owner will not be able to transfer ownership to another owner until the car loan is cleared with the bank.
Does it sound too complicated and lengthy? That is the premise behind CarSwitch.com who walk you through the entire process whether you are buying or selling a used car in Dubai and the broader UAE.