Fancy a new or secondhand motor? Then be savvy about how you finance it, because this is a big purchase and the car loan you decide on now will determine how much you pay for months or years to come.

To put it simply, if you want a AED 100,000 car and you take out a three-year car loan of AED 80,000 at a flat rate of 2.99 percent, you will pay AED 2,422 a month, with total interest of AED 7,176.

Take the same car loan at a rate of 4.5 percent and it will set you back AED 2,522. That may only be AED 100 or so more a month, but over three years it’s an extra AED 3,624! Now that’s something to think about.

Loans and downpayments

But it’s not as simple as going for the cheapest rate. The cheapest rate may require a minimum salary that you can’t meet, or demand you transfer your salary to the bank offering the car loan. For example HSBC currently has an offer of a flat rate 2.49 percent for a new car loan; however you must transfer your salary to them and have a minimum salary of AED 7,500 a month.

The other thing to consider is whether or not you have the funds to pay for the deposit. Under UAE Central Bank rules, anyone buying a car must put down 20 percent of the value of the car. This means that, if you’re buying a car for AED 100,000, you need a deposit of AED 20,000 – another reason to get the best car loan deal in place.

However, there is the option of a lease agreement which requires zero percent downpayment; for example, ADIB currently has a Car Ijarah product needing zero percent downpayment – which can be a plus if you don’t have the immediate funds for downpayment.

Fees, rates and homework

Some loans may also charge an arrangement fee – typically one percent – while others do not, or have a fixed fee of AED 500. Car loans with lower rates may also come with fixed repayment periods, which may cost you more than a loan with a higher rate that you can pay back over a shorter period.

And make sure that, when you compare car loans in the UAE, you consider whether they are at a flat or reducing rate, as comparing reducing rates with flat rates can be extremely misleading. We always list both rates, one being an estimate and one the actual quoted rate by the bank.  [Read more: The difference between reducing and flat rates]

Put simply, you must do your homework and compare different car loans in the UAE before you make your choice. Add up all the costs incurred by taking the loan – not only the rate but the arrangement fee, minimum salary, early settlement fee etc.

Steps to buying

But let’s backtrack a little here…

  1. The first thing you should do is decide what your budget is –  that means how much you can realistically afford from your monthly budget.
  2. Step two is picking a car to fit that budget
  3. Step three is finding the finance deal.

Don’t forget, some banks only lend to reputable companies, so you may be asked to stump up a higher deposit – as much as a third of the value of the car – if they are unfamiliar with your employer.

And remember, when you walk into your nearest dealership to choose a car, you will be directed to a row of desks where busy salesman are waiting to market their finance deal. Don’t be distracted by the shiny new motor in front of you and then agree to sign on the dotted line with the first dealer in the line.

Make sure you do your homework to ensure you have indeed secured the best car loan and that it fits within your budget. It may delay you getting your hands on your dream car, but you will be grateful in the long run.