Auto Finance

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GROUP MEMBERS
M.FURQAN YOUNAS JUNAID ALI SULERI M10MBA007 M10MBA022 M10MBA006 M10MBA027

MUHAMMAD AHMAD NABEEL TAJ GHORI

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TABLE OF CONTENTS

Introduction………………………………………………………………….. ………. Definition …………………………………………………………………………………… Factors to be in mind while going for auto finance……………………….

03 07 07

Financing Glossary ………………………………………………………………………. 09 Best deal ………………………………………………………………………………………. 12 Prudential rules and regulations of SBP ………………………………………. 14 How does auto financing work ……………………………………………………… 16 Types of Auto Finance ………………………………………………………………. Drawbacks of Auto finance ………………………………………………………… 19 20

Ijarah car financing ………………………………………………………………………. 22 Auto finance by commercial banks in Pakistan …………………………….. 25 Difference between ijara and conventional Auto Finance …………….. 33 Issuue of takaful…………………………………………………………………………… 37 Conclusion …………………………………………………………………………………… 39

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INTRODUCTION:
The subject of car finance comprises the different financial products which allows someone to acquire a car with any arrangement other than a single lump payment. The provision of car finance by a third party supplier allows the acquirer to provide for and raise the funds to compensate the initial owner, either a dealer or manufacturer.

For Business sector finance:
Car finance is required by both private individuals and businesses. All types of finance products are available to either sector, however the market share by finance type for each sector differs, partly because business contract hire can provide tax and cashflow benefits to businesses.

Personal Car Finance:
It is a complete subsector of personal finance, with numerous different products available. These include a straightforward car loan, hire purchase, personal contract hire (car leasing) and Personal Contract Purchase. Therefore car finance includes but is not limited to vehicle leasing. These different types of car finance are possible because of the high residual value of cars and the second hand car market, which enables other forms of financing beyond pure unsecured loans. Car finance arose because the price of cars was out of the reach of individual purchasers without borrowing the money. The funding for personal car finance is provided either by a retail bank or a specialist car financing company. Some car manufacturers own their own car financing arms, such as Ford with the Ford Motor Credit Company and General Motors with its GMAC Financial Services arm, which has now been renamed and rebranded as Ally Financial. The funding supplier may retain ownership of the car during the period of the contract for certain types of financing. This interim ownership by a third party and subsequent leasing to the acquirer is far more typical for business assets than private ones, with the option of vehicle leasing being the major exception for private consumers. The finance is arranged either by the dealer which provides the car or by independent finance brokers who work on commission. Individual brokers will provide any solution for which the individual can get credit approval, but their own particular lifestyle and cost considerations that should determine the choice of finance option.

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The leasing share of the US consumer automotive industry expected to grow by 18-25% though this is growing again after the credit crisis cause major leasing companies to exit the market in the US. The [(credit crisis of 2008)] and subsequent recession saw the second hand car market collapse and funding companies had to sell their returning cars at much lower prices than expected. Some major providers stopped offering private contract hire during this period. The Finance and Leasing Association represents the asset, consumer and motor industry in the UK, which includes car finance. The FLA has a neutral website which explains all aspects of car finance for the private individual in the UK. The Federal Trade Commission in the USA is responsible for protecting the rights of consumers in this market. The history of car loans follows the history of cars Everyone’s heard of Henry Ford – he invented the first automobile, right? Wrong. The first automobile was actually invented by a Canadian from Oshawa, Ontario, Sam McLaughlin. He went into partnership with American David Buick to mass-produce McLaughlin-Buick vehicles, preceding the Model “T” by about a year. Subsequently, car registration climbed from 178 in 1903 to just over 2,000 by 1908. That number had tripled within 2 years, but the horse and buggy were still the most common forms of transportation. Then an extraordinary salesman and entrepreneur, William Durant, entered the fledgling automobile industry. William “Billy” Durant founded General Motors. Building on his success with a single automobile, he was the first to assemble a group of automobile companies, including McLaughlin-Buick, under a common management, and he was the first to introduce automobile financing – car loans. He even made a bid to buy Ford Motor Company and it was a done deal, except for the bankers’ distrust, which caused the deal to fall through. Billy Durant was a legend in the automotive industry and was inducted into the Business Hall of Fame in April, 1996. He’s also honored at the Automotive Hall of Fame in Dearborn, Michigan. The first automobile finance company was formed Billy’s success is ironic because he didn’t really care for cars. He thought they were smelly, noisy and frightening to animals. However, being the salesman he was, he realized there could be a good business in selling them. So let’s look at why car loans were invented. In the early days of the motor vehicle industry, dealers had to pay cash to stock their inventory, so they could only buy a few cars at once. Then, with the onset of the assembly line, manufacturers wanted dealers to buy vehicles in large quantities so they could keep the factories running regularly. The only way to do this was to make it possible for consumers to finance their vehicles so the dealers could, in turn, finance the vehicles they bought from the manufacturer.
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So Billy gave ordinary people a way to buy a car when the manufacturers of the time, including Henry Ford, believed that financing a new car would be the end of America. Boy, were they wrong! Billy was a man of vision, and his vision of automobile financing materialized in the form of General Motors Acceptance Corporation (GMAC), the first large non-bank financing source for automobile loans. In 1919, GMAC branches were opened in Detroit, New York, Chicago, San Francisco and Toronto. In 1920, they expanded to Great Britain. By 1928, they’d written their 4 millionth retail contract. As the automobile industry expanded, so did the business of car loans. GMAC’s success in the car loan business was increasing rapidly. Check out the number of retail contracts they wrote, and how much they earned: 1958: 40 million contracts. 1977: 75 million contracts. 1985: 100 million and earnings of $1 billion. 2000: $1.6 billion in earnings. 2001: $1.8 billion in earnings. 2002: Nearly $1.9 billion in earnings. Since its inception, GMAC has provided more than $1 trillion of financing for 150 million cars and trucks around the world. They’re now in 41 countries. Does that give you some idea of the massive size of the car loan industry today? GMAC was only 1 finance company – others joined in GMAC definitely led the way in the car loan business but, of course, the other major manufacturers recognized the profitability and entered the market. These companies are known as “captive finance companies”; that’s simply a term to signify that the lending company is wholly owned by the automobile manufacturer. Examples, other than GMAC, are NMAC (Nissan Motor Acceptance Corporation), Ford Credit (Ford Motor Credit Company), Chrysler Credit (Daimler-Chrysler).

The car loan industry was indeed profitable and, as usual, there are always companies looking to increase profitability. Commercial banks were no exception – they’ve entered into the extremely competitive car loan market, and are increasingly standing tough against the challenge from the below-market rates offered by the financing subsidiaries of
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the captive finance companies. The Federal Reserve Board in the U.S. reports that commercial banks controlled 43% of all auto finance loans outstanding. And now, independent companies are joining the rush. One example is PeopleFirst Inc, founded in 1995 and based in San Diego, California. Capital One, the credit card provider, recognized PeopleFirst’s success and snapped them up. PeopleFirst changed its name to Capital One Auto Finance in June 2003, and now it’s the largest Internet auto lender. Today you can get a car loan at a dealer, or you can join the hundreds of thousands of people who apply online for their car loan. If you are selling your car, you can usually get a trade in deal. The process is the same – your credit history and credit score are checked, along with your current and past personal information, and a decision is made by the lender whether you’re willing and able to repay the loan. And in regards to applying for that loan, we’ll close with a quote from Billy Durant: “Forget past mistakes. Forget failures. Forget everything except what you’re going to do now and do it.” That’s a fitting statement – you’ve got the education; now just go and do it!

DEFINITION:
According to prudential regulations of state bank of pakistan Auto Loans mean the loans to purchase the vehicle for personal use as well as business use. A Finance Lease or Car Lease is a commercial finance product. Under a Car Lease, the financier purchases a car on behalf of the customer, and then leases the vehicle to the customer in return for monthly rental payments. At the end of the term (length) of the lease, the financier gives the customer the option to purchase the vehicle in return for a final installment (residual value). Alternatively, the customer may choose to "trade in" the vehicle, or re-finance the residual and continue the lease

FACTORS TO BE IN MIND WHILE GOING FOR AUTO FINANCING OPTION: Your Target Monthly Payment — What you can afford to pay each month. Unlike
car ads, this number includes tax, title and registration fees that would be included as part of your total loan. Edmunds recommends that these payments do not exceed 20 percent of your monthly after-tax income. This figure doesn't include gas, insurance or maintenance.

Loan Term — We recommend sticking to the typical 60 months. A shorter loan will
make your payments higher. Longer terms, while they may lower your monthly payment a bit, don't justify the jump in the cumulative interest you'll pay over time.

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Market Finance Rate — The prevailing interest rate charged by lenders to consumers
who fall into the second-highest credit tier (which encompasses the majority of the carbuying population). If you can get pre-approved for a better rate from a lender, input it here.

Value of My Trade-In — This assumes that, if you have a car, you are trading it in to
the dealer who is selling you a new car. If you were to sell it to a private party, though, you would get more money to put toward reducing your new loan amount. Our Used Car Appraiser will tell you what your car is worth in both scenarios.

Amount Owed on My Trade-In — The amount still owed on the current financing, if
any, on your trade-in. The difference between the trade-in value and the actual payoff on the trade-in is treated as a credit or debit against the new vehicle. To determine what you owe, you can call the number on your bill, or you can multiply your payment amount by the number of installments you have left before the end of your contract.

Cash Down Payment — Lenders are demanding higher down payments than before.
Try to put down as much as you can afford; shoot for at least 20 percent. This reduces the size of your loan and thus your monthly payment.

Total Down Payment (with net trade-in) — This is the total of your cash down
payment plus your trade-in.

Estimated Price Range — This is your "final answer," the range of sticker prices in
which you should shop. Since most cars can be purchased at a discount from the MSRP, we provide a price range. Finance a car whose MSRP is at or under the top number, and you should be within the range of what you can afford each month. We encourage you to play with the car affordability calculator by changing the inputs to see how they affect one another. This is actually a lot of fun and a great way to learn about financing. The answers you get might be humbling, and you may decide you'd be best off financially if you choose a car in a lower trim, a less expensive model or even a used car. If you follow these guidelines, you'll end up not only with a car you can afford, but also peace of mind

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Financing glossary:

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Expenses
Borrowing money can involve hidden fees, especially when you go to buy a car. Learning a few financial terms can help you keep your bank account healthy and make the most of your money. | March 18, 2010 | Scott Jacobs for Edmunds

Here are the terms you are most likely to encounter when you finance a car through a bank or at a car dealership.

APR: This stands for Annual Percentage Rate. This is related to, but slightly different than,
the interest rate. This is the interest rate times the number of periods in the year. If an interest rate is 4 percent quarterly, the APR would be 16 percent. The APR supposedly makes it easier to compare different loans because it always translates the loan to a yearly figure. But some experts caution putting too much stock into the APR because hidden fees can raise or lower this figure.

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Balance: The balance of the loan is the amount remaining to be paid. Each time you make
a payment, the balance is reduced.

Credit: This word is loosely used in a number of ways. In the financial world, it means the
ability to borrow money. If someone says, "She has strong credit," it means a lending institution would gladly lend her money. A company might be given a "line of credit."

DMV Fees: When buying a car at a dealership, you have to register it and pay for license
plates before you can drive it away. These various fees are referred to as DMV fees. These costs might also be called title and license fees. These fees are a percentage of the purchase price of the car and will slowly decrease as the car ages and loses its value.

Down Payment: When someone buys a car, and finances it through the dealership, they
are usually required to make a down payment of cash. This payment is credited against the balance of the loan. In other words, if you are buying a $20,000 car, and putting down $3,000, the loan will be for $17,000. People wishing to reduce their monthly payments can do this by increasing the down payment.

Finance and Insurance Office: When you buy a car at a dealership, you negotiate
with the salesperson. Once a deal is reached, you are escorted into the Finance and Insurance Office where the contracts are drawn up and signed. This is sometimes called F&I.

Finance: If a car is "financed," it means you are borrowing money -- either as a loan or a
lease -- to pay for it as you drive it. Instead of financing a car, you could buy it outright with cash. When you buy a car with cash, it immediately becomes yours. When you finance the car, the bank owns it, and holds the title, until you've made the last payment.

Four-Square Worksheet: A standard form, used at many dealerships, to help the
salesperson keep track of the four elements of a deal as he negotiates with the customer. The squares allow him to jot down offers and counter offers for the trade-in, the price of the car, the down payment and monthly payments.

Interest Rate: When money is borrowed, the lending institution, often a bank, charges a
small fee for this service. Interest rates are charged as a percent of the amount loaned.

Lease: If you lease something, such as a car, you don't actually own it. You pay a monthly
fee to use the car. At the end of the lease, you return the car and owe nothing more (assuming it is returned in good condition and with the agreed-upon mileage).

Lending Institution: Any company that loans money is a lending institution. It's
sometimes thought that only banks loan money, but this isn't true. Auto loans can be arranged by credit unions, banks or the auto manufacturer itself.

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Sales Tax: When someone buys an item, they are charged a percentage of the purchase
as state sales tax. The actual percentage varies widely from one state to the next and, often, within the state. The sales tax is often made up of a state tax and a local tax. These two are combined for one grand total. On small items, the sales tax doesn't seem significant. But when purchasing a car, it can be a large factor that affects the total cost of ownership.

Term: This is the length of the loan, usually stated in months. Common terms for car loans
and leases are 36, 48 or 60 months.

Title: A title is a legal document providing specific information about the vehicle and
stating who owns it. If you borrow money from a bank to get a car, the title will be held by the bank until you make all the agreed-upon payments.

CAR FINANCING OPTIONS:

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Best Deal

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Understanding the different financing options -- car loans, leasing or paying cash -- will help you reduce costs next time you head to the dealership for a new car. You're sitting in the dealership when the salesperson asks, "So, how are you going to finance your new car?" The question leaves you a little confused. What is he really asking? In the car business, the term financing is loosely used to mean that the dealership will either provide you with an auto loan to buy the car or lease the car to you. The opposite of "financing a car" would be buying it outright with one cash payment. Although you can take out a bank loan to finance your car, many people like the convenience of getting a loan through the dealership. They can walk in, choose a car, fill out a credit application and drive away in a new car. They can do this at night or on the weekends when banks and credit unions are closed. In exchange for this service, the dealer will often charge you more for your auto loan. How much more? That depends. If you have sterling credit, you might get a competitive interest rate and be eligible for special programs that lower your cost. However, if you have bad credit, or no credit, the dealer might charge a much higher interest rate for taking what is perceived as a risk on loaning you money. So, going back to the salesperson's question, "How are you going to finance your new car?" your answer could be one of three things: 1. "I want to buy the car." 2. "I want to lease the car." 3. "I will be paying cash for the car." Let's look in more detail at each of these financing options so you can know what to expect at the dealership:

"I want to buy the car."
If you decide to buy the car and you want the dealership to help you finance it, you will be asked to fill out a credit application. Based on your credit score, an auto loan will be arranged through the dealership's lending institution based on the negotiated price of the car and related expenses (sales tax, title and licensing fees). Loaning money is big business, and most auto manufacturers have their own companies to arrange car loans. For example, Nissan cars are often financed through Nissan Motor Acceptance Corp. You will probably be asked how quickly you want to pay off your new car. Most auto loans are from three to five years -- 36 to 60 monthly payments. Different lengths of time can be arranged, if desired. Obviously, the longer you take to pay off the loan, the lower the
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payments will be. In addition, the amount of your monthly payment will depend on the interest rate, the length of the loan and the amount of your down payment. Keep in mind that the dealership will urge you to make a large down payment. While you are paying off the balance you owe on your car, the lending institution will hold the car's title. Once all the payments are made, the car's title is sent to you and you finally own the car.

"I want to lease the car."
If you decide to lease the car, you will also be asked to fill out a credit application. Based on your credit score, and the length of the auto lease you want, the dealer will shop for a lease for you. Using a sophisticated computer program, numerous banks will be contacted. Each bank will have different terms and conditions. You will need to decide how long you want to lease for (we strongly recommend three years). Also, you need to decide how much you want to pay upfront (we recommend you pay as little as possible to start the lease -- tell the dealer you want to pay "drive-off fees only"). Most auto lease contracts allow you to drive the car 12,000 miles a year. If you typically drive more than this, ask that the car lease be written for 15,000 miles or even 18,500 miles. This will raise your monthly payments but save you money in the long run. Your contract will contain a residual price for the car you are leasing. When you have made all the lease payments, you can then buy the car for this residual price (or you can sometimes negotiate an even lower price to buy the car for). If you decide to return the car to the leasing company, they may charge you for excessive wear and tear to the vehicle. If the car is in great shape, you can get your security deposit back or use it to start the lease of another new car.

"I will be paying cash for the car."
Paying cash for a new car makes the transaction very simple -- all you need to do is negotiate the price of the car and then write the dealer a check for this amount. This removes several variables from the negotiation process: the down payment, the interest rate and the monthly payment. Negotiating in this manner means the dealership can't disguise the true cost of the car. Wait a second, you say, who has the dough sitting around to buy a new car outright? What we're really saying is to borrow the cash from an outside source so you can be a "cash buyer" at the dealership. There are many lending institutions that make loans for new cars. Up2Drive.com will even arrange a loan over the Internet. Again, the process begins with filling out a credit
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application. If approved, you will be given a credit limit and issued a check (sometimes called a draft or bank draft) that can be made out to a dealership. The lending institution will hold the car's title while you make all the agreed-upon payments. When the balance is paid off, you will get the car's title.

Summary:
That is an overview of the credit process you are likely to encounter at the dealership. There are several different strategies for buyers to reduce their costs at the dealership.

REGULATIONS OF STATE BANK OF PAKISTAN FOR AUTO LOANS UNDER CONSUMER FINANCING: Regulation R-9
The vehicles to be utilized for commercial purposes shall not be covered under the Prudential Regulations for Consumer Financing. Any such financing shall ensure compliance with Prudential Regulations for Corporate/Commercial Banking or Prudential Regulations for SMEs Financing. These regulations shall only apply for financing vehicles for personal use including light commercial vehicles also used for personal purposes.

Regulation R-10 Regulation R-11

The maximum tenure of the auto loan finance shall not exceed seven years.

While allowing auto loans, the banks/DFIs shall ensure that the minimum down payment does not fall below 10% of the value of vehicle. Further, banks/DFIs shall extend auto loans only for the ex-factory tax paid price fixed by the car manufacturers. In other words, banks/DFIs cannot finance the premium charged by the dealers and/or investors over and above the ex-factory tax paid price of cars, fixed by the manufacturers.

Regulation R-12

In addition to any other security arrangement on the discretion of the banks/ DFIs, the vehicles financed by the banks/DFIs shall be properly secured by way of hypothecation. Payments against the sale orders issued by the manufacturers are allowed till the time of delivery of the vehicle subject
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to the condition that payment will directly be made to the manufacturer/authorized dealer by the bank/ DFI and upon delivery, the vehicle will immediately be hypothecated to the bank/ DFI.

Regulation R-13

The banks/DFIs shall ensure that the vehicle remains properly insured at all times during the tenure of the loan. However, where the bank/DFI holds 100% provision against such loan, bank/DFI, if deemed appropriate, may not obtain insurance cover for the vehicle for remaining tenure of the loan.1

Regulation O-6

The clause of repossession in case of default should be clearly stated in the loan agreement mentioning specific default period after which the repossession can be initiated. The repossession expenses charged to the borrower shall not be more than actual incurred by the bank/DFI. However, the maximum amount of repossession charges shall be listed in the schedule of charges provided to customers. The banks/DFIs shall develop an appropriate procedure for repossession of the vehicles and shall ensure that the procedure is strictly in accordance with law. 1 Substituted vide BPRD Circular Letter No. 32 of 2009 dated October 12, 2009. 13

Regulation O-7

A detailed repayment schedule should be provided to the borrower at the outset. Where alterations become imminent because of late payments or prepayments and the installment amount or period changes significantly, the revised schedule should be provided to the borrower at the earliest convenience of the bank/DFI but not later than 15 days of the change. Further, even in case of insignificant changes, upon the request of the customer, the bank/DFI shall provide him revised repayment schedule free of cost.

Regulation O-8

The banks/DFIs desirous of financing the purchase of used cars shall prepare uniform guidelines for determining the value of the used vehicles. However, in no case the bank/DFI shall finance the cars older than five years.

Regulation O-9

The banks/DFIs should ensure that a good number of authorized auto dealers are placed at their panel to eliminate the chances of collusion or other unethical practices

HOW DOES AUTO FINANCING WORK:
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Conditions:
Doccuments required : For Business Person : Copy of CNIC. Two recent passport size colored photographs. Last six months Bank statement(s). Residential utility bills (as a proof of residence). Business proof required. Copy of valid driving license (optional). Two references. Bank’s Signature Verification form.

For salaried person :

Copy of CNIC. Two recent passport size colored photographs. Last six months Bank statement(s). Recent salary slip. Employment certificate. Residential utility bills (as a proof of residence). Copy of valid driving license (optional). Two references. Bank’s Signature Verification form.

For self-employed person: Copy of CNIC. Two recent passport size colored photographs. Last six months Bank statement(s). Copy of professional degree/certificate. Residential utility bills (as a proof of residence). Copy of valid driving license (optional). Two references.
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Bank’s Signature Verification form.

Auto financing typically is done through either the car manufacturer or a more traditional lender such as a local bank or credit union. Car loans are provided based on your credit score, income, assets and debts and are subject to all types of adjustment based on your desirability as a borrower. Financing a car is often a complex process that does not need to be.

Dealer Perspective

Some buyers believe dealers prefer a customer who walks in with cash and makes the deal. In reality, dealers stand to make much more off the interest and fees involved with a financed vehicle than a simple cash sale. Financing is a major part of the income of any auto dealer. From the point of view of the buyer, a car loan works like the key that gets you into a vehicle you may not otherwise be able to afford. It is important to do some shopping both for the loan and the car, then get your best price at the dealer before broaching the subject of financing. Car loans can be beneficial to both parties if you understand how they work and what to avoid.

Getting Approved :

The interest rate on car loans can vary tremendously based on the financial profile of the person making the purchase. If your credit score is excellent and you make enough income to cover your debts easily, you should be able to secure the lowest rate offered. If there are any issues with your profile, the rates will be adjusted upward to compensate the lender for the increased risk involved with making the loan. If you have less-than-desirable credit, the lender may request more of a a down payment to raise your stake in the purchase and to reduce the overall principal being borrowed.

Interest:

Once you have been approved for the auto loan, the type of interest due also can make a significant difference in the monthly and overall cost of the car. If your loan is a simpleinterest loan, it will be calculated on the total balance alone. For example, if you buy a car for $10,000 at 5 percent interest, the interest on the principal will be $500. In the case of a
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loan with compound interest, the interest for a given period of payments (a year, for example) will be added to the principal and the interest will be assessed on the overall total. Simple-interest loans are more desirable for the borrower but are harder to come by in the auto market.

Incentives :

Although the incentives that car dealers offer can be tempting, in the end they may cost you more. Car dealers often offer on-site financing at a rate that sounds competitive with traditional lenders. What you don't see are the built-in fees, dealer commissions, points and compound interest, which bring the overall cost of the car well above what it would be with a bank loan at standard market rates. Even if you elect to use an outside lender but allow the dealer to shop around for you, kickbacks and commissions paid to the dealer by the lender will increase the cost of your loan. Always check out the dealer incentives being offered, but read the fine print and shop around for your loan.

TYPES OF AUTO FINANCE IN WESTERN COUNTRIES: Auto loan terms :
vary widely in lengths of time and payment amounts. In addition, the term of an auto loan can affect the interest rate, amount of total interest paid and the overall price of purchasing a new or used vehicle. Therefore, it is important to understand the types of terms available with most new or used car loans and how they can affect the amount you actually pay. Listed below are types, and descriptions, of auto loan terms normally available when purchasing a new or used car:

Short Term Auto Loans :
Short term auto loans are loans made for the purchase of a new or used car and have payment terms of 12 months (one year) up to 36 months (three years). These types of loans are designed to help a consumer quickly pay off a loan obligation for a new or used car purchase. However, the payment amounts of shorter term loans can be somewhat high or burdensome for some. Short Term Auto Loans generally offer lower interest rates than do longer term loans; however, this is not always the case. People with bad credit may be required to use shorter term loans in order to be approved by certain auto loan lenders. In these cases, interest
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rates can be somewhat higher than normal as people with bad credit can sometimes be expected to "buy back their auto credit". Under these circumstances, short term loans enable a person, with bad or poor credit, to re-establish his or her credit history. Dealerships that specialize in short term auto loans for people with bad credit are many times the "Buy Here - Pay Here" type dealerships you may encounter. While short term auto loans are often used for people with bad or poor credit, those with good or excellent credit will often opt for these types of loans as well. People with excellent credit can often get very low interest rates with these types of shorter duration loans; because of the relatively cheap cost of credit for these type of consumers, it makes sense for them to defer total payment of a vehicle for two or three years.

Advantages:
•Quick payoff of a car loan •Increased trade-in value after the completion of •Much lower interest payments and lower overall cost of ownership obligation the loan

Disadvantages:
•High or expensive individual monthly •May require additional sacrifices to afford higher monthly •May be difficult to sustain if the customer loses a job or income payments payments

Long Term Auto Loans
Long Term Auto Loans are usually car loans that have payment terms longer than 36 months (three years) up to about 84 months (seven years). Longer duration auto loans are designed to allow customers to make smaller, more affordable monthly payments on a car or truck. While the individual monthly payment amounts are much lower with long term auto loans, the amount of interest paid over the life of the loan increases dramatically. The increased accrued and paid interest can substantially increase the overall cost of ownership with a new or used car or truck.

Advantages:
•Smaller and more affordable monthly •Frees up money for other obligations and •May be able to be sustained if a customer loses a job or income payments expenses

Disadvantages:

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•Car or truck may be little, or significantly reduced, trade-in value at the end of the loan term •Substantial increase in amount of interest paid and accrued •Increased overall cost of ownership When making your next used or new car purchase, carefully consider the term options available to you. You should always choose a term that allows for a payment well within your budget. At the same time, choose a term that allows you to pay off an auto loan as quickly as possible

DRAWBACKS OF AUTO FINANCE: Paying Interest :
As with virtually any type of loan, a car loan requires you to pay interest in addition to the principal, effectively raising the total cost of the car above the sticker price. Your interest rate will depend on a number of factors, such as your credit history, the lending institution and economic conditions in general. If poor credit results in a higher interest rate and higher monthly payments, you may need to stretch out the payments over a longer time period to make them more affordable. Unfortunately, this means you'll pay even more in total interest over the course of the loan.

Financial Implications:
Financing a vehicle can make it easy to bite off more than you can chew. When you're in the dealer's showroom, it can be a challenge to avoid the temptation of purchasing a more expensive car than you can truly afford. You might rationalize the higher monthly payment at the time by deciding to cut back on saving and investing. Consequently, your long-term financial outlook may suffer accordingly.

Insurance Considerations:
When you finance a vehicle, you're probably buying a brand-new or late-model used vehicle with a relatively high value, so your auto insurance premiums may also be higher. Additionally, your financing company may require you to carry higher liability and physical damage coverage than you normally would to protect its interests. If you're in a position where you owe more on the vehicle than what it is worth, which can occur quickly due to depreciation, you may also need to purchase gap insurance to make up the difference in the event of a total loss.

Possible Repossession:
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Auto financing is a form of secured loan, meaning you must agree to put up the vehicle as collateral to gain approval for the loan. It also means that if you fall behind on your payments, you might look out your window one day and see a tow truck hauling the vehicle away. In addition to having to find a new way to get to work, a vehicle repossession puts a black mark on your credit history than can last for several years

Bankruptcy Auto Loans, Auto Loan after Bankruptcy
Re-establish your credit with after an auto financing bankruptcy. We specialize in bankruptcy car loans and bankruptcy auto loans We have all gone through tough times financially. Auto credit is a great way to rebuild your credit file after your bankruptcy has been discharged. We have many lending options and programs available after bankruptcy.

THE THREE MOST COMMON TYPES OF BANKRUPTCY ARE:

1. known as liquidation, allows individuals or businesses to give up nonexempt assets and walk away from most debts. 2. For individuals and, more commonly, businesses to reorganize debt. 3. Allows the filer to draft a plan to repay some debt while retaining assets.

WHAT HAPPENS TO CUSTOMER’S CREDIT RATING?
Most people regain credit within two years after they complete their bankruptcy car loan case by demonstrating good payment habits following their bankruptcy. By making these payments on time each month, good credit is being reported on their behalf. So, with most of their old debt discharged and nothing but on time payments being reported for the past two years, many ex-bankruptcy debtors find themselves having good credit again. You want to be sure to make your payments on time to recover from bankruptcy auto loan. Also, it’s extremely important to keep your re-established bad credit car loans current. Most banks have a dim view of consumers filling for bankruptcy and going delinquent

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afterwards. Make sure you can make the payments before entering into another car loan. As with most sub prime car finance, which a loan after a bankruptcy falls under, money down helps considerably by limiting the banks liability.

AUTO FINANCE IN PAKISTAN UNDER SHARIAH COMPLIANCE:
Islamic mode of auto finance:

IJARAH:
Ijarah is a rental agreement, under which the usufructs of an asset is transferred to the client on pre-agreed terms and conditions. It is a Shariah Compliant mode of finance, adopted by Askari Islamic Banking to meet the Car Financing needs of its valued customers

Following Banks are offering Islamic modes of Car financing :

1. MEEZAN BANK :
2. As a step towards Meezan Bank’s mission to provide a one-stop shop for innovative value-added Shariah compliant products, Meezan Bank’s Car Ijarah unit provides car financing based on the principles of Ijarah and is free of the element of interest. 3. 4. Car Ijarah is Pakistan’s first Interest Free car financing based on the Islamic financing mode of Ijarah (Islamic leasing). This product is ideal for individuals looking for car financing while avoiding an interest-based transaction. 5. 6. Meezan Bank’ Car Ijarah is a car rental agreement, under which the Bank purchases the car and rents it out to the customer for a period of 3 to 5 years, agreed at the
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time of the contract. Upon completion of the lease period the customer gets ownership of the car against his initial security deposit.

2. DUBAI ISLAMIC BANK :
It's time you drove your car with pleasure and peace of mind!

Dubai Islamic Auto Finance offers a world class auto finance facility that enables you to get a car quickly, conveniently and in a fully Sharia compliant manner. Using Musharaka cum Ijara model to finance your car, steer yourself towards peace of mind and fulfillment of your desire.

4. ASKARI BANK LINITED:
We are Shariah Compliant and market competitive. Askari Islamic Banking deals in all kinds of new, locally assembled, as well as imported vehicles. Terms and conditions we offer are most flexible, with prompt processing time. Moreover,in order to enhance customers’ convenience, we offer family income evaluation plan, where our valued clients can also avail Ijarah Bis Sayyarah facility for more than one vehicle.

In Ijarah, as Bank is the owner of the vehicle and only transfers its usufruct to the customer, hence, customer is responsible for any risks and liabilities attached to the usage of the vehicle, while risks relating to ownership remain with the Bank throughout the Ijarah period.

Key features :
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Prompt Processing Time. Facility to acquire more than One Vehicle. Facility Income Evaluation Plan. Low Security Deposit. Competitive Profit Rates.

AUTO FINANCE BY COMMERCIAL BANKS IN PAKISTAN: Bank Alfalah limited:
The Product Alfalah Car Finance is specially designed for you. Addressed below are answers to some frequently asked questions: Can I avail the car loan facility? Yes, You can get Loan From Bank Alfalah provided you are, 1. Pakistani National Identity Card Holder 2. Over 21 years of age (Maximum 65 years till maturity of loan) 3. Having income from following sources, o Employment (Permanent/Contractual) o Business (Partnership/Proprietorship) o Co-Borrower’s Income (Clubbing of Income) Which cars I apply this loan for? Following Categories are being offered in BAL Car Financing
   

Brand New Pakistani Manufactured Vehicles Semi-Commercial Vehicles for personal use 2nd Hand Vehicles (Registered Vehicles) Imported Vehicles

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How much loan facility can i avail? Minimum of Rs. 200,000/- and maximum of Rs. 4,000,000/- (For Used Vehicles minimum of Rs. 100,000/- and maximum financing limit is 2,000,000/-)

What is the priod of the loan? The loan can be availed from 1 year to 5 years with early adjustment facility at any time before the maturity (varies with the type of vehicle and the age of the customer)

How much initial down payment do I have to make? For Brand New locally manufactured - 20 % of the value of the Car For Imported/ used Vehicles – 25% of the value of the Car (As assessed by Approved Evaluator of Bank) What other charges do I have to pay? You have to pay processing fee of Rs. 4,000/- (exclusive FED), registration charges and first year’s insurance premium. Who will insure the car? Bank Alfalah has made arrangements with top insurance companies which are offering special low insurance rates for Bank Alfalah clients. How do I repay the loan? You will repay the loan by following modes
 

Making easy equal monthly installment to Bank Alfalah in the form of post dated cheques. Through Debit Authority and providing security Cheques

Can I repay the loan before the maturity? Yes, you have the option to repay the loan at any time during the tenure of the loan with premature termination penalty as per SOC. What is the security of the loan?

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The car is the security, which will be hypothecated in favor of the bank and lien will be marked with the registrar. What if I want the car in the name of my family members ? You can avail the facility with joint registration title with Spouse Siblings (real brother/real sister) Son/Daughter Father/Mother Father In-law / Mother In-Law What documents are required to get a car loan sanctioned? Our representative will discuss in detail the documents you are required to submit. An indicative list is given below: Two passport size photographs Copy of Computerized national ID Card Bank statement for the last six months Salary certificate specifying the name , date of joining, designation and salary details Signatures Verified from your Banker Same above documents of Co-Borrower (In Case of Co-Borrower Case)

How is it different from other financing schemes available in Pakistan? Quickest processing & Turn Around time in the Market Minimum Documentation Requirements Variable & Fixed rates to cater to every Budget No Termination Charges on car Replacement Discounted Insurance Rate with Free Tracking Device Balloon payment Options Deferred Insurance & Registration Charges 150 Cities Existence

UNITED BANK LIMITED :

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U B L

D r i v e

I M C

A l l i a n c e

Mark Up: Fixed Rate and Floating Rate (Consult your nearest UBL Branch or IMC Dealership for updated rates)
Minimum Equity: 20% Tenure of Finance: Min. 1 Year & Max 5 Years

Processing Fee: Rs.4000/- + FED

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Insurance Rates: Competitive Insurance Rates. (Consult your nearest UBL Branch IMC Dealership for upd UBL Drive - Pak Suzuki Auto Finance Arrangement Program Priority Delivery: Fast Track Delivery Mark Up: Fixed Rate and Floating Rate (Consult your nearest UBL Branch or Pak Suzuki Dealership for updated rates) Minimum Equity: 20% Tenure of Finance: Min. 1 Year & Max 5 Years Processing Fee: Rs.3000/- + FED

Insurance Rates: Competitive Insurance Rates. (Consult your nearest UBL Branch or Pak S Priority Delivery: Fast Track Delivery

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MCB CAR FINANCING: CAR 4 U

MCB CAR 4 U:
       

Option for financing or leasing Financing tenures from 1 to 7 years Options for new as well as used cars Option for local as well as imported cars Financing up to Rs. 20 lacs Option for early payment. Option for Replacement Loan Option for first year insurance financing

CITI BANK CAR FINANCING:

  

10% Down payment 1 to 7 year financing period Upto 12 installments waived

Processing Fees: Rs.4000/-

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HABIB BANK CAR FINANCING:
HBL CarLoan helps you get your preferred car through a simple and hassle-free process, backed by superior service and support. Now you can drive a car you always wanted. Features : Choice of used, new local/imported and reconditioned imported car. • Repayment options ranging upto 7 years. • Upto 85% of financing for the car of your choice. • Insurance at all times for complete peace of mind and security. • Round the clock support available through HBL PhoneBanking; you can place your requests and queries, track the status of your repayment/loan account and avail other value-added services through HBL PhoneBanking.

BANK AL HABIB CAR FINNACING : Apni Car

Welcome to Bank AL Habib APNI CAR Bank AL Habib APNI CAR- The car financing facility which gives you complete peace of mind through convenient repayment plans. Why wait then, contact us now for any assistance in getting your APNICAR.

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PRODUCT FEATURES: Financing available for Brand New & Imported Cars Minimum Down Payment for Brand New Cars is 20% & 40% for Imported Cars Minimum Loan: Rs 250,000/Maximum Loan: Rs. 2,500,000/- for Brand New Cars and: Rs. 1,500,000/- for Imported Cars Loan period is 1-5 years. Affordable monthly installments. No Pre-payment penalty. Partial payments allowed with no charges Choice of reputable insurance companies at competitive rates. Quick processing and minimal documentation Our highly trained executives will take care of your financing requirements. The only thing you need to worry about is choosing the car and its colour. SONERI BANK CAR FINANCE : Purchase of brand new: Un-registered cars for private use. Un-registered light commercial vehicles for private use. Debt Burden : Total monthly repayment installments not to exceed 40% of the net income (taking into account other financing facilities availed from other Banks/DFIs).

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Insurance : Cars / Motor Vehicles financed are to be comprehensively insured with any of the Insurance Companies listed on the approved panel of Soneri Bank.Insurance Premium is payable up-front for each year during the life of the loan

SUMMIT BANK :
We are Summit Auto Finance. The services of Summit Auto Finance are focused towards bringing auto financing deals for borrowers, right at their doorstep. It has been seen generally that people fail to get auto financing deals according to their specifications. While a major reason for this lies in borrower's lack of expertise in the field of auto loans. Other reason is the lack of time with borrower. Because of both these reasons, a borrower finds himself with inappropriate deals in auto financing. Now Summit Auto Finance offers its help in arranging auto loans. And it is very easy to get finance for vehicle purchase through Summit Auto Finance. Borrower just needs to complete a short application form, which is available on our website. This is the key to auto financing deals with a host of banks and financial institutions operating here. We have associated with these banks and financial institutions to bring for our borrowers loan Summit Auto Finance, it is much easier to search auto loans according to ones requirements. Application form is the best place to make known your requirements. Now when you receive quotes from the banks, check each quote to find if they compliment your requirements. Since many quotes are available to a borrower, he is able to easily compare amongst them and reject the ones which do not come to the expectations of borrowers.

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Also borrowers can request quotes by filling up the small quote form available on our website. Auto loan calculator will also be helpful to a borrower in computing the monthly repayments.

DIFFERNCE BETWEEN CONVENTIONAL AND ISLAMIC CAR FINANCING
Car Ijarah’ has been designed according to the principles of Islam and is completely interest-free. Moreover the Ijarah contract and other documentation also comply with Shariah requirements. On the other hand, a conventional car-financing scheme is actually an Interest based loan given by the financial institution and interest is charged on that loan. Also, in conventional car-leasing schemes, the lease contract is not in compliance with Islamic Shariah and has Riba and other un-Islamic elements in it. In ‘Car Ijarah’ the asset remains in the ownership and risk of bank and the customers only pay the rentals for use of the asset; just like house rent. These differences are described in detail below:

BASIC DIFFERENCES :
1- LEASING V/S FINANCING: The traditional schemes provide financing for purchasing car, i.e. in essence they are giving loan and earning interest. The Islamic car financing is entirely different. It is not a financing scheme rather it is a lease contract. The word financing here has been used as a generic term. The Islamic car financing -- Ijarah is based on a lease contract. It is not a hybrid contract. IJARAH is an Arabic term with origins in Islamic Fiqah, meaning to give something to rent. Leasing is a contract whereby usufruct rights to an asset are transferred by the owner, known as the lessor, to another person, known as the lessee, at an agreed-upon price called the rent, and for an agreed-upon period of time called the term of lease

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2- RENTALS V/S INSTALLMENTS :
Islamic car financing is based on pure rentals. In ‘Car Ijarah’ the asset remains in the ownership and risk of bank and the customers only pay the rentals for use of the asset; just like house rent. On the other hand, a conventional car-financing scheme is actually an Interest based loan given by the financial institution and interest is charged on that loan.

DIFFERNCES IN SCHEME

OWNERSHIP In case of the conventional mode of car financing, the car is purchased in the name of the buyer from the dealer. This is not the case in Ijarah, where the ownership remains with the bank, that is the car is purchased from the dealer in the name of the primarily. This is because it is the foremost condition of Islamic mode of leasing that an objet cannot be leased out unless it is in the possession of the lessor. RISK/LOSS Since the car is bought in the name of the buyer in the traditional mode of car financing, the risk is immediately transferred to the buyer whereas in the case of Islamic financing, this is not so. The car is purchased in the name of the bank from the dealer and so the risk remains entirely with the bank. As the corpus of the leased property remains in the ownership of the lessor, all the liabilities and risks emerging from the ownership shall be borne by the lessor. The lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to the wear and tear, which normally occur during its use. But he cannot be made liable to a loss caused by factors beyond his control. The agreements of the traditional car financing generally don’t differentiate between the two

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situations. In a lease based on the Islamic principles, both the situations should be dealt with separately. DOWN PAYMENT V/S SECURITY DEPOSIT In Ijarah the buyer is required to keep a security deposit at the bank. The minimum requirement for security deposit is 20% of the car value and the maximum is 50%. The requirement is different in the case of conventional car financing. In the traditional mode there is a down payment made by the buyer of the car. The amount required for the down payment is 20% of the price plus the installment for the first year. Both the down payment and the security deposit mentioned above are one-time payments. The major difference occurs because the buyer can buyback the car against the security deposit in case of Ijarah, where as in case of conventional banking the down payment is entirely of the bank, and no buy back of the car occurs against the down payment. RETURN In the Islamic mode of financing, the buyer has the right to return the car anytime during or at the end of the lease period. Since this is a lease agreement and the lessee has been paying rentals, he can return the car to the bank and take back the security deposit any time he wishes to. On the other hand in a traditional car financing scheme the customer takes a loan to purchase the car and which h cannot return in any case what so ever. TERMINATION The buyer of the car has the option and right to terminate the contract and return the car before the contract reaches its maturity in both the conventional and Islamic mode of car financing. The difference lies in post termination phase. In the conventional car-financing scheme if the customer wants to terminate the contact the only option he has is to buy the car by paying the rest of the installments. Whereas in the Islamic car financing scheme the customer has two options; either he can return the car and get back the security deposit or

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he can buy the car from the bank at the market value plus a certain percentage of spread for the bank. DOCUMENTATION

SEQUENCE/PROCESS
Islam considers the procedure as a significant factor in case of all modes of financing. The underlying difference between the Islamic and the conventional mode of financing is that of the process. It is not only the end result it is also the means to it that are important. If the result is correct and the steps are wrong or vice versa, the entire process is wrong. According to Islamic principles, lawful steps to lawful results are very important. The most important financial difference between Islamic permitted leasing and conventional financial leasing is that the leasing agency must own the leased object for the duration of the lease. Ownership of the asset is the prerequisite for leasing out its usufruct and therefore Islam emphasizes on the sequence.

MARKET PRESENCE
INFRASTRUCTURE The conventional banks and leasing companies have strong long-term relationships built with dealers and operate on a larger scale as compared to Meezan bank in the area of car financing. These have direct sales agents aiding in the process of car financing and have proper infrastructure built with an area in the bank or the leasing company devoted to car financing.

ISSUE OF ISLAMIC INSURANCE (TAKAFUL) FOR CAR FINANCING :

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Despite the inefficient legal system and policies of the Central Bank of Pakistan, there is a handful of Islamic financial institutions in operation in the country, providing its people with an alternative mechanism in tune with their faith. Although efforts of these institutions should be lauded, there is not a single Takaful operator in the country. Due to this reason, Meezan bank at is present using the conventional insurance for car financing until an Islamic model of insurance is created. However the bank in collaboration with Pak Kuwait investment is involved in developing a working model of Takuful to overcome this issue. The Federal Shari'ah Bench of the Supreme Court, Pakistan, had, in a landmark judgement late last year declared the present financial system repugnant to the principles of Islam and ordered the government to abolish the 'interest-based system' and establish an alternative Shari'ahbased system. Although the judgement frees the Insurance Act 1938 from the payment of interest (amendments in clauses S.29 (8) b, c iii, S.47 B (1), (2) and S.81 (2)(d) that relate to the calculation and payment of interest), the Supreme Court is silent as to the permissibility of insurance practiced in the country since it was not part of the case filed with the apex court. Now, if the country were to transform its entire financial system to a Shari'ah-based system, it has to extensively inspect all the obstacles involved and must altogether resolve the loopholes found in the system. It is no doubt a daunting task but the government is confident that the objective will be met.

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PROBLEMS IN DEVELOPING TAKUFUL Here is a brief detail of some of the foreseen problems in the establishment and working of a Takaful company in Pakistan. INSURANCE ACT 1938 The Insurance Act 1938, a legacy of the former British rulers, is the law governing the insurance operations in Pakistan and does not have any provisions for the establishment of a Takaful company. Although the Act has a provision for registration and operation of a mutual insurance company that is very close to the concept of Takaful, there are a number of requirements unlawful from the Shari'ah viewpoint. A new Insurance Act, the draft of which has been prepared to replace the old one, does not even have the provision for the operation of a mutual insurance company. INVESTMENTS The law requires all insurance companies to invest a minimum amount in government securities, which are Riba-based, and thus is unacceptable for an Islamic insurance company. Besides the legal requirements, the avenues for halal investments are currently limited. Investment in the country's volatile stock markets is also unsuitable for a Muslim and is considered un-Islamic due to the risk and interest involved. Re INSURANCE According to the Insurance Act, insurance companies are required to have a minimum of 20 percent reinsurance from the Pakistan Insurance Corporation, which provides reinsurance based on the conventional set-up and does not offer the facility of Re-Takaful. A number of local businessmen and investors have initiated steps to establish a Takaful company in Pakistan and practical models and products have been developed through the assistance of Takaful companies and Islamic financial experts in the Muslim world. Repeated requests for the

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grant of permission as a special case with the National Insurance Controller have however gone unheard. Following the judgement of the Supreme Court against riba, Pakistan, with a population all set to switch to an Islamic financial system, presents a promising market for Takaful. Although the first company to offer Takaful in Pakistan will have to face a number of regulatory problems, the Takaful operator will nevertheless enjoy a flourishing market, comprising the ever growing number of Shari'ah-based transactions.

CONCLUSION : It has opened new door for the banking sector to expand its business as well as expansion of the business of the automobile industry. Moreover customers can get their desired automobiles in a convenient manner which facilitates cash flow management and tax advantages.

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