A loan is a financial product where you borrow an amount of money that will be paid back in full plus an interest amount. An agreement is made between the borrower and lender, and the loan amount, interest rate, tenure, terms, and other fees, are discussed before the loan is officially disbursed. Loans are used to make payments, such as buying property, cars, paying for education, personal expenses, and/or for other reasons.
There are two types of loans available in the Pakistan Market: secured and unsecured loans.
Secured loans require a collateral/security to be submitted to the bank or lending company (leasing companies etc) against money borrow from them. For mortgage or home loans, collateral is usually the property itself which you are paying for. For car loans, your car is held as collateral. Secured loans are relatively low-risk loans, since the bank holds security against the loan hence may take back the asset in case of non-payment/default from the borrower. Therefore the bank is guaranteed repayment of the loan. The loan amount is usually equal in value of the collateral.
Unsecured loans do not require a collateral. Lending decisions are made based on the borrower's monthly income, credit history, profile and debt burden ratio. These loans are seen as high risk loans, and therefore have higher interest rates than secured loans. Unsecured loans have shorter loan tenures than secured loans. A secured loan can have a repayment period of upto 30 years, while unsecured loans typically have a maximum of 7 years repayment period. Loan providers also have a maximum limit to the amount of loan dispensed.
Auto loans are secured loans that you can borrow from a bank or lending agency. Auto loans are used to pay for purchase of a new or used vehicle. Since an auto loan is a secured loan the vehicle is held as collateral by the bank withholding the vehicles registrations documentation till you have fully paid the loan back.
Floating rate loans, fixed rate loans and car Ijara are the most popular auto loan types in Pakistan.
Floating rate auto loans are based on a bench mark rate referred to as Karachi Interbank Offered Rate (KIBOR) plus a spread. eg. KIBOR + 4%. The KIBOR is the rate at which the bank basis its lending activity. The KIBOR is usually used as a standard to extend loans to its customers. The rate in floating auto loans is subject to change . This means that in the subsequent year (s) a new installment schedule is provided, since the KIBOR fluctuates. This can be beneficial at times when interest rates are expected to decrease, however the opposite also is applicable when interest rates rise.
Fixed rate auto loans: As the title suggests, auto loans on the fixed rate basis remain unchanged over the course of the loan. Fixed loan rates are beneficial to take out when the interest rates are at an all time low. Unlike the floating rate which changes as the bench mark loan changes, the fixed rate loan and payments in lieu of will remain the same over the entire duration of the loan.
Car Ijara: is the Islamic form of Auto financing. Ijara may be translated as a “rental” whereby the Islamic bank offers the car to the consumer at a floating monthly rental. The car will remain the property of the Islamic bank and may be available for purchase at the end of the Ijara term at a salvage value. The monthly rental is subject to change as per the policy of the Islamic bank.
Loans are available from banks, Islamic banks and private companies, and requirements tend to vary across lending institutions. In general, these are the eligibility requirements for getting a loan:
- At least 21 years of age, but not over 60
- Monthly gross salary of at least Rs 30,000/-
- Must be a Pakistani citizen or have Pakistan Resident status
These are the documents banks and lending agencies will ask for:
- Copy of CNIC
- Copy of latest 1-3 month payslip
- Copy of latest 6 months Bank Statement showing salary
If you are self-employed, a copy of your NTN, Tax Return, Form 29 might be required.
Properly managing your loan involves knowing the terms of your loan so you can plan your payments accordingly. Some things you need to watch out for are the monthly interest rates and the annual percentage rate (APR) which are added to your principal amount. You also need to take note of your minimum monthly repayment, so you can plan your budget.
When choosing your auto loan, look for lowest APR or the profit rate in the event you are looking for car ijarah, the monthly repayment/rental amounts, as well as your total repayment amount (i.e. the total value you pay back over the course of the loan)
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