# fair car loans, does they exists?



## Vento (Dec 30, 2011)

I started to look into car loans. To be honest, not something i know a lot about.

But it seems, that the interest for the whole loan period is calculated and put on top of the loan.

example

you borrow 120.000
interest for 4 years is 22800

your balance is now 142800 which is devided into 48 monthly payments.

So basically if you want to settle the loan after for example 1 year. You will end up paying interest for all 4 years, even if you only borrowed the money for one year.

Now, as stated in the beginning. Im no expert into loans and other financial stuff, but this seem very favorable for the banks, and something you should avoid unless you want to pay 20% interest 

Q: Who's offering car loans with reducing balance? Anyone know that?


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## basc (May 18, 2011)

I have a reducing personal loan from ADCB. I had to give a salary / EOSB guarantee letter.

(I used it for a car, but did not get a car loan as I prefer to keep the paperwork simple).


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## indoMLA (Feb 6, 2011)

Vento said:


> I started to look into car loans. To be honest, not something i know a lot about.
> 
> But it seems, that the interest for the whole loan period is calculated and put on top of the loan.
> 
> ...


Yes, the local banks advertise that they charge lower interest rates but faile to tell you that the rate is guaranteed (profit to them). This means that the rate is charged on the INITIAL principal amount and you owe that to them regardless. If you get a car loan, stick with the Western banks (HSBC, Standard Chartered, etc.). The rates will be higher, but the interest will be calculated on the outstanding principal every month and NOT the INITIAL principal.

We have discussed this here before, there should be threads with examples and calculations done for presentation. 

Good Luck.


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## Bigjimbo (Oct 28, 2010)

indoMLA said:


> Yes, the local banks advertise that they charge lower interest rates but faile to tell you that the rate is guaranteed (profit to them). This means that the rate is charged on the INITIAL principal amount and you owe that to them regardless. If you get a car loan, stick with the Western banks (HSBC, Standard Chartered, etc.). The rates will be higher, but the interest will be calculated on the outstanding principal every month and NOT the INITIAL principal.
> 
> We have discussed this here before, there should be threads with examples and calculations done for presentation.
> 
> Good Luck.


This drives me wild! The fairest way to calculate a loan is by working out the total amount and dividing the interest equally throughout the whole of the payments. This is a FLAT RATE deal. The OP is incorrect as the bank give a settlement figure on request which is less the remaining interest, although they typically charge 60 days as a small penalty.

If a bank does do a reducing rate then typically this is because it is a "front loaded" agreement on the 89 principle (1st payment is 1 part principle 88 parts interest, 2 payment is 2 parts priciple and 87 part interest etc) The is grossly unfair and actually illegal in the UK.

The rate of interest over the term (flat rate) is the only way to determine how good a deal you are getting when comparing hire purchase vs personal loan for the purchase of a car. Typically in the UAE car loans are exceptionally cheap (between 3-5% flat) whilst the personal loans from the big lenders (hsbc, standard chartered etc) are around 8%, so will INVARIABLY cost more.

The only exception to this rule is when the dealership offers a PCP (personal contract plan). these are often called something else like Options, etc. Then these can offer a much cheaper monthly payment but with a higher rate of interest. It is almost inevitable that buying a car with a personal loan is the most expensive way of purchasing a car.

Rant over.


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## Vento (Dec 30, 2011)

Bigjimbo said:


> The OP is incorrect as the bank give a settlement figure on request which is less the remaining interest, although they typically charge 60 days as a small penalty.


If this is correct, then i prefer flat rate as well.

But only example that i personally heard of, the customer was told it was up for negotiation after the loan was settled.


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## Canuck_Sens (Nov 16, 2010)

There is a thread that I posted a while back in regards to rates. 

There is a difference between balance reducing rate and profit rate. What you described falls under the profit rate definition, which is common in Islamic Finance.

If everyone quotes using profit rate you have to look for the best profit rate you can get

If you want to find out what a profit rate means in terms of balance reducing rate to have an idea you can do it by:

a) doing the maths yourself. You can convert profit rates to balance reducing rate

b) You can also ask the person to quote the rate using the balance reducing rate (bear in mind that they will not compute the fee they charge to open the facility to calculate the real rate. You will have to do it)


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## Jynxgirl (Nov 27, 2009)

If you are going to pay off your loan quickly, try to get the western version, but if you are going to make monthly ontime payments and not more, then usually the islamic ones work out better. 

Personally, no way would I get a loan here. Too worried on the what if.... Get a small loan back home and buy a used one and save until you can afford to buy a new one, or you get fed up with dubai and leave after a year like so many other people who then are stuck trying to sell a one year old vehicle at a large loss.


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## rsinner (Feb 3, 2009)

I think I had posted in the thread Canuck mentioned as well. For a 4 year "5%" loan, I think on a reducing balance method the actual interest rate is about 9%. 
As long as you know this and recognise this, you just have to give in to the fact that this is the way the market works. On the prepayment, I think you are wrong in assuming that you still pay interest for the entire period. You will need to check, but there is a prepayment penalty but you don;t need to pay the entire interest for the remaining period


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## zin (Oct 28, 2010)

rsinner said:


> I think I had posted in the thread Canuck mentioned as well. For a 4 year "5%" loan, I think on a reducing balance method the actual interest rate is about 9%.
> As long as you know this and recognise this, you just have to give in to the fact that this is the way the market works. On the prepayment, I think you are wrong in assuming that you still pay interest for the entire period. You will need to check, but there is a prepayment penalty but you don;t need to pay the entire interest for the remaining period


I've been told if I want to pay my loan early there's a UAE law that says you pay something like a 1% penalty on the remainder of your loan. What I'm not sure about is whether you have to pay your loan + interest over the years you took out the loan + this 1% on remainder of the loan or just remainder of loan + 1%


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## rsinner (Feb 3, 2009)

zin said:


> I've been told if I want to pay my loan early there's a UAE law that says you pay something like a 1% penalty on the remainder of your loan. What I'm not sure about is whether you have to pay your loan + interest over the years you took out the loan + this 1% on remainder of the loan or just remainder of loan + 1%


The penalty will depend on the bank, but it will be X% of the outstanding principal only. The percentage will vary from bank to bank, and if you envisage that you are going to prepay make this one of the parameters you compare the various banks on when loan hunting. Also, quickly googled and this is what I found
gulfnews : Your Money: Paying off a loan early can add up

PS: do be very sure how the interest rate works. Whether it is actually fixed or the bank has any leeway on changing the interest rate.


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## indoMLA (Feb 6, 2011)

Bigjimbo said:


> This drives me wild! The fairest way to calculate a loan is by working out the total amount and dividing the interest equally throughout the whole of the payments. This is a FLAT RATE deal. The OP is incorrect as the bank give a settlement figure on request which is less the remaining interest, although they typically charge 60 days as a small penalty.
> 
> If a bank does do a reducing rate then typically this is because it is a "front loaded" agreement on the 89 principle (1st payment is 1 part principle 88 parts interest, 2 payment is 2 parts priciple and 87 part interest etc) The is grossly unfair and actually illegal in the UK.
> 
> ...


Bigjimbo,
Sorry to cause you to rant, but....
1. Front Load Loans are not unfair and in as much as I have searched and asked my British acquaintances, none know this type of loan to be illegal since they utilize them. But if you know otherwise, please post.
2. We have discussed this before and I think ideally they should utilize the math and logic you outlined, but the number don't match and align. Something ain't right, so for me, I have abandoned trying to buy anything with a loan from a local bank.


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## Zexotic (Sep 3, 2011)

HSBC deal with a flat rate and not a reducing balance rate. I confirm this. The flat rate of 4% over 4 years works to about 7.42% reducing balance if I can recall correctly.

Regarding early settlement, let's say you take a loan at 4% flat for 3 years of AED 10,000. The interest will come to AED 1200 (10,000 x 4% x 3). So the total you will have to pay is 11,200 in 36 installments. This 11,200 is GUARANTEED to them. AED 311.11 per month. Let's say after a year you want to settle the loan in full. You would have paid 12 installments to them (Total AED 3,733). So your outstanding amount is AED 7,467. You will have to pay this and an ADDITIONAL 1% on this amount (AED 75). So in total you will have to pay them AED 7541 to settle the loan. 

In short, you pay the interest for all three years, and an additional 1% to settle early, which is quite ridiculous.


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## indoMLA (Feb 6, 2011)

Zexotic said:


> *HSBC deal with a flat rate and not a reducing balance rate*. I confirm this. The flat rate of 4% over 4 years works to about 7.42% reducing balance if I can recall correctly.
> 
> Regarding early settlement, let's say you take a loan at 4% flat for 3 years of AED 10,000. The interest will come to AED 1200 (10,000 x 4% x 3). So the total you will have to pay is 11,200 in 36 installments. This 11,200 is GUARANTEED to them. AED 311.11 per month. Let's say after a year you want to settle the loan in full. You would have paid 12 installments to them (Total AED 3,733). So your outstanding amount is AED 7,467. You will have to pay this and an ADDITIONAL 1% on this amount (AED 75). So in total you will have to pay them AED 7541 to settle the loan.
> 
> In short, you pay the interest for all three years, and an additional 1% to settle early, which is quite ridiculous.


That is interesting cause last year I was trying to get a loan from them and they were quoting me reducing balance loans between 8-12%.


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## Zexotic (Sep 3, 2011)

In effect they can say they offer both, but if you take a flat rate it's 4% and if you take a reducing balance it's 7.42% (over four years - this is recalculated depending on the term of the loan to equate it to the flat 4%). Effectively they both translate to the same. Every other rule regarding early settlement etc is also the same.

To compete with local banks, what they advertise is the flat rate and not the reducing balance rate. 

The entire principle of reducing balance (You pay interest on the the remaining principal only, and if you settle early you pay only the remaining principal plus a penalty) is not seen anywhere and not applicable on car loans by HSBC. I'm not sure if ANY bank here offers this.


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## zin (Oct 28, 2010)

Zexotic said:


> HSBC deal with a flat rate and not a reducing balance rate. I confirm this. The flat rate of 4% over 4 years works to about 7.42% reducing balance if I can recall correctly.
> 
> Regarding early settlement, let's say you take a loan at 4% flat for 3 years of AED 10,000. The interest will come to AED 1200 (10,000 x 4% x 3). So the total you will have to pay is 11,200 in 36 installments. This 11,200 is GUARANTEED to them. AED 311.11 per month. Let's say after a year you want to settle the loan in full. You would have paid 12 installments to them (Total AED 3,733). So your outstanding amount is AED 7,467. You will have to pay this and an ADDITIONAL 1% on this amount (AED 75). So in total you will have to pay them AED 7541 to settle the loan.
> 
> In short, you pay the interest for all three years, and an additional 1% to settle early, which is quite ridiculous.


Thanks for the clarification, I believe this is was ADCB did to me on my car loan but I got a good rate of 2.75% so it's not all bad. I should have gone for 3 years instead of 5 maybe though.


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## Vento (Dec 30, 2011)

So i called one of tbe big banks, and was told that if i settle early, i still need to pay the interest of the entire contract lenght.

A general manager from the same bank said in the article posted a few posts up, that you dont pay the full interest if you settle early, but a 1 percent penalty.

The same bank have reducing balance auto loan om their homepage, but the product doed not exist.

Properly just better to buy cash it seems, and go for a less expensive car )


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