Dubai: Whilst in Monopoly you can acquire the 'Get Out Of Jail Free' card; for many with consumer debt in the UAE it may read something like the 'Go To Jail-Do Not Pass Go' card; especially for those who have simply got their personal finances mismanaged by the odd dirham or two for the odd month or so.
Every nation's approach to financial services has its ironies and inconsistencies.
One of the biggest for the UAE remains the fact that, on the one hand, lenders and credit card companies are allowed to aggressively solicit the layman to acquire debt.
Yet, on the other, should that debt be mismanaged, (in international terms), by a 'smidgen', the borrower faces all the hardships of your average common criminal, (readers need to know that a 'smidgen' is a sum or volume used by granny to arbitrarily define a sum of 'not much').
Financial fraud
Bottom line: borrow money in the UAE for cars, property, or whatever, and the consequences of mis-management do not always seem to fit the crime. The amount of investment I see being 'cashed-in' to pay consumer debt, plus known stories of hardship for those with debt and no other assets leads to this view.
Ironically, it seems to be a sound system for reducing the amount of blatant financial fraud. For this week though, the concern is debt as part of financial planning for the average UAE resident.
In an inflationary UAE, managing debt will become more topical, and the draconian rules applied mean that the most useful advice on debt management is: avoid getting into debt in the first place.
This week's column then is about simple steps to manage debt, and, if you end up in debt with a creditor, what steps can you take to mitigate or prevent the 'Go To Jail' card. With consumer debt becoming more widespread, the advice has to be useful to someone, somewhere.
The third party source I borrowed from to help is the AOL online money pages.
The trigger for getting me on to the subject was their web search statistics which indicated that their readers/users ranked loan repayment second in importance by way of the number of searches under the broader heading of financial services.
For the record, car insurance was up there at number one; reducing energy costs at number three, then, from 4th to 8th: tax; starting a business; property; stocks and shares and, in eighth place, exchange rates.
Interestingly, investor/user search bias was towards issues that assist in reducing costs rather than issues that increase wealth.
AOL suggest that the four most important things to do once you are in debt are: firstly, make a complete list of debts.
Secondly, work out a budget.
Thirdly, whatever you do, don't avoid repayment of all or part of the liability for that month/period.
By far the most logical thing to do (even in the UAE) is to contact the creditors and liaise with them on how to repay. Fourthly don't borrow more money.
Whilst this would be logical advice for many scenarios, the exception would be where the creditor is allowing you to consolidate debt at a cheaper rate allowing the borrower to free up more monthly earnings. A rare facility in the UAE.
The point on budgeting is important. In many countries the income and expenditure analysis is a critical part of financial planning. The tool does not have widespread usage in the UAE's financial services world. How many debts can be prevented by enforcing this simple exercise?
Ultimately, consumers should not fear lenders and creditors.
The 'Go To Jail' card is mostly dished out to those that have failed to communicate with lenders and creditors. So it is vital consumers understand that debt is a two way communication process.
Every payment, whatever amount, is a clear sign of the intent to honour a financial commitment
How to break the cycle of debt
For those already in debt, AOL has provided a four point plan on how to negotiate with creditors:
- Step One: Explain clearly what you can pay and how often.
- Step Two: Be realistic about what you can afford. Creditors might even accept 'token' offers of a few dirhams, as long as they can see that it is part of a plan to repay the debt eventually. After all, jails full of bank and credit card customers is not good PR for those companies.
- Step Three: Creditors may challenge you on proving the accuracy of your income and expenditure position, so be prepared. If you have lost a job, been out of work through illness that has reduced your income, be prepared to provide the data and evidence.
- Step Four: If creditors do not respond, pay a small amount that you can afford anyway. This is sound advice. The fact that you are paying monies in is clear evidence of your intent to pay. Third parties, such as the courts, looking at the evidence and the intent to pay, are more likely to sympathise with the borrowers position.
The writer is managing director of Mondial (Dubai) LLC.
