Purchasing a car can be an exciting and nerve-wracking experience. It is usually a big expense and — given the impact a car has on your life — an event that deserves a lot of research.
How to best finance this purchase is the most common challenge.
Today, a large percentage of car purchases are made through auto loans.
Ultimately, everyone wants to get the best interest rates for their auto loan — but just how can you do that?
With many banks and financial companies offering auto loan financing at different terms, buyers should learn how to shop around for the best car loan deals to maximize the value they get for their money.
Thankfully, new technology is now solving this problem. Indeed, there are bank and loan aggregation apps that make the car loan application process easy while providing customers the ability to compare all interest rates and offers in the same place.
FinFirst Capital offers a fast, secure and easy marketplace to compare multiple lenders in one super app. This pioneering platform is a first-of-a-kind for the region, allowing highly customized access to a wide range of financial services, including auto financing and car insurance, as well as of digital car showroom.
However, before we learn more about this new match-making technology, lets first review all the information you need to know about auto loan financing to help find the best deals for your next car purchase. In this article, we will cover the following:
- The Cost of Car Loans
- Factors Affecting Interest Rates
- Other Factors Affecting a Car Loan Agreement
- Shopping Around for Good Interest and Better Terms
- FinFirst Loan Matching Application
The Cost of Car Loans
First off, what is a car loan?
In essence, a car loan is money you borrow from a bank or another financial organization to purchase a car. The bank or financial organization acts as the lender, and you as the borrower.
These institutions charge interest on the loan and you pay the principal and interest amount over an agreed period of time. Moreover, the borrower has to make monthly repayments until the full amount of the loan (principal plus interest) is settled.
Importantly, the interest rate that banks charge on car loans represent their perception of the risk of handling the transaction.
Though banks advertise a representative APR (annual percentage rate) for the car loans they offer, only about 51% of lenders get accepted for the advertised APR.
There are certain factors that banks, financial companies, and other auto loan financing organizations consider to determine the interest rate applicable to every borrower.
To understand how to get a good interest in your car loans, it is essential that you know the factors that determine the interest rate the bank will charge you.
Factors Affecting Interest Rates
Below are four fundamental factors every lender will consider when deciding on an interest rate.
A down payment is an amount you are willing to pay in cash for the value of the car. When you have some available cash for the down payment, it reduces the loan you need from the lender.
However, another added advantage is that down payments can reduce the interest rate on your auto loan. The fact that you have some cash to pay gives the lender a higher level of confidence in your ability to repay the loan going forward.
The loan term is the number of years (or months) it will take you to repay the loan. Put differently; the loan term is the duration of the loan.
When the loan term is longer (say five years), your monthly payment will be lower. On the other hand, when your loan term is shorter (say three years), your monthly payment will be higher.
However, a shorter loan term will reduce the interest you pay on the loan. In other words, the loan term does not affect your interest rate (directly), but your interest payments.
Let’s take an example: If Mr. A gets a car loan of KD 10,000 with a 5% interest rate and a loan term of 5 years (60 months), the monthly interest payment will be KD 39.2. If Mr. B takes the same loan, but with a three-year term, the monthly interest payment will be KD 37.34.
Income and Debt
Your income and debt will also determine the interest rate the lender offers. Lending organizations use the debt to income ratio to measure the risk they are taking up by lending money to an individual.
In Kuwait, the allowed DTI is up to 40%. If your DTI is high, lenders will charge a higher interest rate.
Age of Vehicle
Typically, we would expect a new car to have a higher interest rate compared to a used car. But this is not the case.
When we think from the lender’s perspective, we’ll see why the opposite is true. Since a new car is more valuable than a used car, banks can get a higher value should they have to repossess the vehicle and sell it off.
Put simply, new cars are less ‘risky’ to the bank.
Therefore, new cars will have lower interest rates compared to old cars.
Other Factors Affecting a Car Loan Agreement
While the interest rate may be the most significant factor in an auto loan financing transaction, other factors affect the desirability of a car loan. Below are some of them.
The approval process can be long (and tedious) or short. This will impact the time interval between the submission of a request and your access to the money.
A faster approval process is better than a slower approval process, all things being equal.
This is the period between the date you purchased the car and your first monthly repayment. Some lenders have a month grace period while others have up to four-month grace periods.
You need to be aware of any other extra charges like registration and management fees. The lower the additional expenses, the better.
Some lenders may require you to insure the vehicle with them. Usually, these lenders will provide free liability insurance for customers.
Shopping Around for Good Interest and Better Terms
When looking for good interest rates, it is not enough to shop around if you don’t know actually what you are shopping for.
In essence, you need to shop for auto loan financing with a low interest rate (offered according to the factors described above), shorter terms, shorter approval process, longer grace period, little to no additional charges, and free insurance.
How to Shop Around
One way to shop around is to look at the websites of popular car lenders and compare them in terms of the above-listed factors. Here are some of the popular ones and brief highlights of their car loans:
- Kuwait Finance House: Kuwait Finance House offers car loans to the tune of KD 25,000. They do not have a specific minimum salary requirements.
- Kuwait International Bank: Kuwait International Bank requires a minimum monthly salary of KD 200, minimum monthly installment of KD 30, and minimum financing of KD 1000. The maximum car loan offer is 15 times your monthly salary or KD 15,000. The representative APR is 4.6%.
- National Bank of Kuwait: NBK offers a 4.5% interest rate (on a declining basis) on auto loan financing. They do not require a downpayment, the minimum salary is KD 400, and the maximum loan offer is KD 25,000.
- Gulf Bank: They charge a 3% interest rate on car loans. They do not require a downpayment. You need a minimum salary of KD 300 to apply, and the maximum loan offer is KD 25,000.
- Al Ahli Bank of Kuwait They charge a 4.6% interest rate on car loans. They do not require a downpayment, the minimum salary is KD 300, and the maximum loan offer is the lesser of 25 times your monthly salary or KD 25,000
- Commercial Bank of Kuwait: They charge a 4.5% interest rate on their car loans. The maximum loan offer is KD 25,000, and there are discounts on car agencies.
- Ahli United Bank: AUB requires a 20% downpayment and a minimum of a KD 400 monthly salary. They offer a 6.67% interest rate on car loans and a grace period of 30 days.
FinFirst Super App: A Better Way to Shop Around
Instead of going from one website to another, wouldn’t it be great to have a centralized place where you can view the rates and terms of multiple car lenders?
FinFirst’s financial match-making platform makes this possible. With the FinFirst Super App, you can say goodbye to personal visits and long application processes. Besides auto financing and car insurance, our platform allows easy access to a wide range of financial products, including:
- Business loans
- Bank accounts
- Investment funds
- Life insurance
- Consumer loans
Through our Super App, you became instantly connecting you with top lenders, providing a clear and customized financial experience. From a data-generated list of financial products, you then get to choose which lender, rate and services works best for your.
That’s the revolution of fintech that FinFirst offers — all in the palm of your hand.
Apply now to get started. Our application process takes less than 10 minutes, bringing you faster to being funded than ever before.
The Kuwaiti car industry is booming, and more people are taking up car loans. Car loans have a cost — the interest rate on those loans.
Factors like income, debt, the age of the vehicle, loan term, and down payment affect the interest rate on car loans. Other factors like the approval process, grace period, charges, and insurance also affect the desirability of a car loan.
The goal of the borrower is to get a good interest rate and better terms by shopping around for the best deals. However, today it’s no secret that going through the traditional loan application process can take up to three weeks and lead to lots of confusion that could cost you money.
With FinFirst, you can fill out one simple, six- part application and submit all your paperwork online in just 10 minutes.
Do you need a car loan? Are you planning to apply for one? Check out our platform to evaluate the different lenders and make a choice that will improve your finances.