Thinking of buying a car? You have several financing options to look at depending on your situation but you will need to know the difference between personal finance, car financing and lease with promise to own before you decide on the most suitable choice for you.

Personal finance or car financing?

How do you decide whether to fund your car purchase by taking out personal financing or by taking out car financing? Each option has advantages and disadvantages that you need to know.

Car financing

Your car will be mortgaged to the bank

When you take out car financing, the vehicle will be mortgaged by the bank. This means that it will be registered in the bank’s name until you have paid off the finance amount and all profits back. You may be required to check in with your bank regularly to get permission to continue to drive the car. Also, if you need to have any repair work done after an accident, you may be required to get an authorization letter from the bank before you hand it over to the certified or authorized repair shops.  This applies specifically when an accident has occurred. Several banks will only allow you to deal with a list of car repair shops that are pre-approved by them. So make sure you are aware of this information beforehand.

You could get financing without salary transfer but profit rates can be much higher

One advantage of car financing is that several banks can offer this without the requirement of your salary being transferred to them. However, bear in mind that profit rates in can be higher.

[Compare car finance in Saudi Arabia]

[Related: How does debt-to-burden ratio affect me? | How do you switch banks in Saudi Arabia?]

Buying your car through personal finance

Your car is not mortgaged giving you some more freedom

Taking out personal finance to fund your car purchase could be a viable option if you are eligible for it. The advantage is that you own the car from the day you buy it. You would not be required to obtain permission to drive your car and you have the freedom of selecting the car repair shops of your choice. But remember that your car insurance type and provider may restrict which type of repair you can get. Some insurance companies allow repairs directly with the dealers, whilst others have a recommended list of repair centres.

You could get a lower profit rate if your salary is transferred to the same bank

If you are eligible for personal finance from the bank to which your salary is being transferred, you could be charged a lower profit rate compared to the one you could be charged on car financing. Check your eligibility as it may depend on your salary, age, employer and which sector you work in among other criteria.

[Compare personal finance for Saudi nationals | Compare personal finance without salary transfer in Saudi Arabia]

[Related: How do you switch banks in Saudi Arabia?]

Lease with a promise to own

If you are not eligible for either car financing or personal finance, you may still have a third option: Lease with a promise to own is provided by some banks and even instalment companies in Saudi Arabia. Under this financing, customers sign two contracts at the start. One contract is for lease and the second is a promise of ownership of the car, which would be transferred at the end of the loan tenor. But a main point to bear in mind is that transfer of ownership will depend on the last balloon payment you make. As a customer you will have a choice to make: you could make all the payments and if at the end you decide not to make the final payment you can return the car to the bank. If you do decide that this product is for you, just make sure you make your repayments on time otherwise you risk the car being repossessed in case you default.

Editor’s tip: whichever finance option you choose to fund your car purchase, make sure you are aware of the profit rates and costs involved in each option. Be aware of your responsibility towards the bank or finance company providing you with the facility and always make sure you are able to repay the financing. Remember also that in the case of car financing, you may be required to put a down payment towards the value of the car. Banks in Saudi Arabia typically require between 15% and 20% down payment but this may vary from one bank to the other.