Buying a Car in UAE: Should I finance with a Car loan or Pay Cash?Published on : 16/Aug/2017
The funny say in UAE,
if you have money buy a used car, if you don't buy a brand new car!
with easy access to car loans and financing, more than 95% options to finance buying a car in Dubai. Practically few people has the luxury of problem to decide between a car load or cash when they buy used car in uae . It is a nice problem to have for a few.
It comes down to couple of questions:
- What is your cash reserve? If you buy a car and pay it in full, is anything left as savings?
- If you have the cash, wouldn't be better to invest it in an investment that brings higher return than the interest you will pay for a car?
So the three factors that would help you determine to buy a car on loan in uae or cash are:
- The interest rate for buying a new or used car. This should the Effective Interest Rate, not flat interest rate.
- Availability of alternative secure investment that would give higher income than the interest you will pay on a car loan.
- Total savings you have now and you can accumulate in the future.
Let's start by point 3. Even if you decide to buy a used car in dubai in cash, the total you pay for a new or used car in UAE shouldn't exceed 20% of your total cash reserve or even less. If you are paying anything higher than that, you are buying a car above your means. So if your financial capability is to buy a Toyota Camry, you shouldn't be tempted to buy a BMW X5, just because the BMW X5 is available for sale in dubai at cheap or bargain price.
For point 1 & 2, the calculation is simple. For example if the car loan effective interest rate is 3.5% and lets say you find a great mutual funds investment that will yield 5.5% over the same period. Let's assume the new or used car purchase value is AED 100,000. A car loan over 4 years period (48 months) with 3.5% effective interest will cost you AED 7,300 in total over 4 years. However, a mutual fund at 5.5% yield would return more than AED 20,000 over the same period.
So if you have access to good investment, there are plenty available in UAE, like buying an apartment in Dubai, or investing in great mutual funds like government supported securities, then buying your next great car with a car loan may be a wise choice. You can always look for great deals from Car dealers in Dubai & Abu Dhabi in seasons like Ramadan or end of year for special discount and cheap new cars for sale in UAE.
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