It goes without saying that in today’s Pakistan owning a car is no longer a luxury but a necessity. Auto Loan / Car Financing is a standard product offered by most banks, for both new and used cards. The first and the most important decision you make when opting for an Auto Loan /Car Financing is realizing the maximum cost you can comfortably afford, since this is a long term commitment of up to 7 years. You need to ensure that you can comfortably afford the monthly payment of the Auto Loan, in addition to fuel and maintenance expenses. What percentage of income you want to set aside for Car Financing will be a personal decision based on your household income and expenses.
6 Things to Pay Attention to when Considering an Auto Loan / Car Financing:
- Interest Rate: Interest rate / mark up / service charge are a percentage charged on the loan amount which is different from the value of the car for the duration (tenure) of your Auto Loan. This can be a fixed rate – the same rate for the entire tenure of your Car Financing, or Variable rate – a rate that is based on the market and can change year to year. It’s generally recommended that you opt for a fixed rate for your car loan to avoid the volatility of the financial market.
- Insurance/ Takaful Cost: All banks require your cars that are financed to be insured and these can range from 3% – 5% per year, depending on whether you opt for a tracker and if your car is a “hot” car that is prone to theft. This is typically paid in full for one year at the start of your Auto loan and then charged in monthly installments for the next year. Some banks offer the flexibility to make quarterly payments for your insurance.
- Financing Amount: The total amount of financing a bank will offer you depends on what type of car you would like to get, local or imported, new or used, and will differ bank to bank. Generally most banks offer Auto Loan / Car Financing of up to Maximum 85% of the total value of the car.
- Tenure: This is the total duration of your Auto Loan. 7 years is generally the maximum tenure offered for Car Financing. This is calculated using the manufacturing date of your car. For example, a Suzuki Mehran 2010 model can only be financed for 3 years instead of 7, since it would be a 4 year old car.
- Early Settlement Options: In case you wish to pay off your car before the Car Financing tenure is over, the bank usually charges a fee for early settlement.
- Flexibility: You can make a balloon payment and reduce the tenure or monthly payment of your car loan. Some banks offer this facility and it is advisable to have this option open for you.