Money for a Car: A Guide to Auto Financing

Nobody wants to be the dumb buyer in a car buying deal. You have to be smart or you end up losing more money than you ought to. It is a very common scheme among car buyers to first get money in order to buy a new car.

The term is called “auto financing” and it simply means how you pay for a vehicle. You can finance a car by taking out an auto loan to own a car, in which case, you have two options: You either use the money from the loan to buy the car, or use it for lease.

If this isn’t your first time buying a car, you might already know that the salesman or your car dealer will be checking your credit report before starting with the negotiations. But this is not the only way you can go to get that new car of yours. The seller will try to sweeten the deal and offer you special car finance situations in exchange for throwing yourself totally at his mercy. That is not a path you have to choose.

The key is preparation. Knowing what auto financing options you have before you get to the dealership will mean that you can take charge of your credit and take charge of your car loan.

Just remember, when you negotiate with the salesman for the most favorable auto loan, nothing is permanent until you have it in writing. So haggle and then haggle some more. Once negotiations seem to be over, that’s when the sales contract is prepared.

Inflated Interest Rates

To have the deal agreed upon by you and the salesman be put in writing in a binding contract is top on the list of the things you must do involving auto financing. Often involved at this part of the procedure is to determine monthly auto loan payments based on an interest rate. Now, as you well know, the interest rate varies from car buyer to car buyer. Your credit is only one of the factors and if the interest rate a car buyer qualifies for is inflated, then the dealership can make extra profit off your loan. That’s just one of the pitfalls in auto financing.

Independent Auto Financing

When you have the approved auto financing option on hand, you can then proceed with the deal as a “cash buyer” so to speak as you already have the cash in hand from the loan and you are just buying the car from the dealer with that money. Car salesmen prefer customers to be “monthly payment” buyers as this makes it easier for them to obscure the total cost of the vehicle, to the detriment of your savings. So wizen up and take that independent auto financing option available.

Set a Price Range

Having a budget is the sensible thing to do. If you set a sensible price range for yourself, then you have less reason to go beyond that range and succumb to the temptation of overspending. If you’re really firm on that budget, no amount of sales talk can sway you. One good tip is to ensure that your monthly car payments and related expenses do not exceed about 20% of your monthly net income.

Discounted Financing vs. Rebate

Here’s the dilemma to car buying: Many dealers offer an option between discounted financing or a rebate, but not both. Discounted financing means that you get zero-percent financing while rebate means that you get a certain amount of cash some time after purchase. The common error many car buyers make is that the zero-percent loan will deliver the most savings. But will it really?

Get the Cash Rebate

In most cases, it’s better to get the cash rebate and apply it against the purchase price of the vehicle. If you already have a pre-approved car loan, then that’s even better because you have positively no need of extra financing from your dealer. Just use your car loan to finance the car and let the rebate handle some of the charges.

You will have to choose how long you want your lease to be and how much you’re willing to pay upfront. The obvious choice, of course, would be to pay as little as possible, but be sure to weigh other options as well. After that, the car is yours for the period stipulated in the lease contract.

There are several other different plans those car buyers like you can adopt in order to make the most out of your money and reduce costs at the dealership. Understanding the credit process is just one way of being a smart buyer.

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Mortgages and Loans: Islamic Finance Avoids Interest.

Two million Muslims in the UK face an ethical dilemma if they want a mortgage or a loan. Conventional mortgages and loans all require the payment of interest and “riba” as interest is called under Islamic law, is forbidden by the Koran.

British financial institutions are increasingly catering for Muslims’ specialist needs through a number of alternative arrangements that respects the teachings of the Koran. Here are just two of them:

Ijara with diminishing Musharaka – the mortgage alternative.

Ijara with diminishing Musharaka is an Islamic alternative to a conventional UK mortgage and has been adopted by several British banks and building societies.

In essence, Musharaka means partnership. Under this Islamic financial concept, the bank buys the house and legally becomes its owner. Then throughout the pre-agreed period, say 25 years, a monthly payment is made. Each monthly payment includes a charge for rent and a charge that buys a small proportion of the house itself. It’s form of variable shared equity plan with the proportion of the house being owned by the purchaser, steadily increasing as payments are made. Once the final payment has been made, the house is owned outright. Ijara

Here you tell the bank or financial institution what you want, for example a car, and they buy it. In return for a monthly payment that covers the cost of the bank’s capital, the bank then allows you to use the asset for an agreed period. In reality, it’s a form of leasing

Islamic finance is not widely available in the UK – so where can find it? Here are three suggestions:

Over the last few years Lloyds TSB has introduced Islamic products to 33 of its branches. Their spokesperson says, “It’s important for our customers to see that we are following the right procedures. We have a panel of four Islamic scholars who over-see the products. They offer guidance on Islamic law and audit the products”.

Another high street bank, HSBC, is developing a special range of Islamic products under the Amanah brand name. This range includes home finance plans, home insurance, commercial finance, and various current accounts and pensions. Hussam Sultan, the Amanah product manager says, “As a bank, we are not here to moralise or tell our customers that Amanah finance is the way to please Allah. We’re just here to provide them with a choice”.

The Islamic Bank of Britain has three branches in London, two in Birmingham and one each in Leicester and Manchester. They’re the only British bank specifically providing for Muslim customers and claim to be halal throughout their operations. All their financial products are approved by their Sharia’a Supervisory Committee – all Muslim scholars who are experts in all aspects of Islamic finance.

For your interest we show below, definitions of some words used widely in connection with Islamic finance.

A Glossary of selected Islamic words used in finance.

Amanah: Means trustworthiness, with associated aspects of faithfulness and honesty. As a central supplementary meaning, amanah also describes a business deal where one party keeps another’s funds or property in trust. This actually the most widely used and understood application of the term, having a long history of use in Islamic commercial law. It can also be used to describe different financial activities such as deposit taking, custody or goods on consignment.

Arbun: Means a down payment. It’s a non-refundable deposit paid to the seller by the buyer upon agreeing a sale contract together with an undertaking that the sale contract will be completed during a prearranged period.

Gharar: This means uncertainty. It’s one of three essential prohibitions in Islamic finance (the others being riba and maysir). Gharar is a sophisticated concept that encompasses certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as speculation, derivatives and short selling contracts.

Islamic financial services / Islamic banking / Islamic finance : Means financial services that meet the specific requirements of Islamic law or Shariah. Whilst designed to meet specific Muslim religious requirements, Islamic banking is not restricted to Muslims. Both the customers and the service providers can be non-Muslim as well as Muslim.

Ijara: Means an Islamic leasing agreement. Ijarah permits the financial institution to earn a profit by charging leasing rentals instead of lending money and earning interest. The ijarah concept is extended to hire and purchase agreements by Ijarah wa iqtinah.

Maysir: Means gambling. It’s another of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition of maysir is often used as the basis for criticism of standard financial practices such as conventional insurance, speculation and derivative contracts.

Mudarabah: A Mudarabah is a form of Investment partnership. Here, capital is provided by the investor (the Rab ul Mal) to another party (the Mudarib) in order to undertake a business or investment activity. Profits are then shared according to pre-arranged proportions but any loss on the investment is born exclusively by the investor and the mudarib then loses the expected income share.

Mudarib: The mudarib is the investment manager or entrepreneur in a mudarabah (see above). It is this managers responsibility to invest the investor’s money in a project or portfolio in exchange for a share of the profits. A mudarabah is essentially similar to a diversified pool of assets held in a conventional Discretionary Managed Investment Portfolio.

Murabaha: means purchase and resale. As opposed to lending money, the capital provider purchases the required asset or product (for which a loan would otherwise have been taken out) from a third party. The asset is then resold at a higher price to the capital user. By paying this higher price by instalments, the capital user effectively gets credit without paying interest. (Also see tawarruq the opposite of murabaha.)

Musharaka: This means profit and loss sharing. It’s a partnership where the profits are shared in pre-arranged proportions and any losses are shared in proportion to each partners’ capital or investment. In Musharakah, all the partners to the commercial undertaking contribute funds and have the right, but without the obligation, to exercise executive powers in that undertaking. It’s a similar concept to a conventional partnership and the holding of voting stock in a limited company. Musharakah is regarded as the purest form of Islamic financing.

Riba: This means interest. The legal concept extends beyond interest, but in simple terms, riba covers any return of money on money. It does not matter whether the interest is floating or floating, simple or compounded, or what the rate is. Riba is strictly prohibited under Islamic law..

Shariah: This is the Islamic law as disclosed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah product must meet all the requirements of Islamic law. To facilitate this, a Shariah board is usually appointed. This board or committee is usually comprised of Islamic scholars available to the organisation for guidance and supervision for the development of Shariah compliant products.

Shariah adviser: Means an independent professional, usually a classically trained Islamic legal scholar, appointed to advise an Islamic financial organisation on the compliance of its products and services with Islamic law, the Shariah. While some organisations consult individual Shariah advisers, most establish a committee of Shariah advisers (often known as a Shariah committee or Shariah board).

Shariah compliant: Means the activity that ensures that the requirements of the Shariah, or Islamic law are observed. The term is often used in the Islamic banking industry as a synonym for “Islamic”- for example, Shariah compliant financing or Shariah compliant investment.

Sukuk: This has similar characteristics to a conventional bond. The difference is that that they are asset backed and a sukuk represents the proportionate beneficial ownership in the underlying asset. The asset is then leased to the client to yield the profit on the sukuk.

Takaful: This is Islamic insurance. Takaful plans are designed to avoid the characteristics of conventional insurance (i.e. interest and gambling) that are so problematical for Muslims. They structure the arrangement as a charitable collective pool of funds based on the comcept of mutual assistance.

Tawarruq: When used in personal finance, a customer with a cash requirement buys something on credit on a deferred payment basis. That customer then immediately resells the item for cash to a third party. The customer thereby obtains cash without taking an interest-based loan. Tawarruq is the opposite to murabahah.

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