Most people borrow money at some point in their lives. When there isn't enough cash to pay for the household bills, a child's education or a medical treatment, a loan from the bank can be a lifesaver in troubled times.
However, as much as everyone wants to get the money they want to borrow, the lending business just doesn't work that way. Some loan applicants get approvals without so much hassle, others don't.
In recent times, lending standards have tightened and many personal loan requests have been denied. Borrowing funds to repay credit card debt has proved particularly difficult.
It is not surprising to see banks unwilling to lend easily. Prior to the financial crisis, lenders were handing out credit with far too much ease.
"Many of the banks were heavily burnt by defaulting loans not too long ago and this will not be forgotten easily," notes Rupert Connor from Acuma Wealth Management.
Unsecured credit
Popular among average-income earners, a personal loan is a form of unsecured credit that is not backed by a collateral or security of a property. Repayments are made out of salary, end of service indemnity or any other form of legal income. Loan interests can range from 11 per cent to 22 per cent per year, although rates levied on credit card debt can be doubly expensive.
When reviewing personal loan applications, each bank follows its own rule about salary size or age of borrowers and reviews an individual's bank statement, to see clues about how he manages his money. Some banks also blacklist residents, companies or even market sectors they deem unworthy.
So, your credit approval partly hinges on whether or not your employer has been blacklisted by the lender. Low income and bad credit behaviour such as late payments, exceeding credit limits or having overdue accounts will also prompt a rejection.
If you constantly maximize your credit card balance, it suggests you are living beyond your means and this alone may cause a rejection, according to Steve Gregory, managing partner at Holborn Assets.
"Any defaults and previous police cases may also count against you, though it is not always possible for a bank to learn of them in this country, let alone if they occurred abroad."
At Lloyds TSB, an applicant's credit history is an important part of the scrutiny and it is something that is carefully taken into consideration. The bank generally looks at the last six months in terms of income and expenditure, to ensure that it gets an accurate picture of the customer's circumstances.
"The decision to approve a loan is one that we make following detailed conversations with the customer to understand their financial circumstances and their existing obligations," says Richard Musty, managing director at Lloyds TSB in the Middle East.
"We work carefully with our customers to provide them with the support that they need, but within the boundaries that they can afford."
The same is true at Emirates NBD, which carefully reviews every applicant's monthly income, debt burden ratio, employer and repayment history. "Lending is based on individual credit behaviour," says Shekhar Krishnamurthy, head of retail assets and liabilities at Emirates NBD.
Despite tight lending rules, Krishnamurthy says all "credit-worthy" individuals continue to avail themselves of loans from the bank.
"These loans are extended only after carefully assessing the applicant's monthly financial commitments. Once we are fully convinced of the repayment capacity of the applicant, a loan is disbursed with a suitable repayment tenor that enables the borrower to repay comfortably."
Besides, banks have been recently mandated to follow UAE Central Bank guidelines on personal loan applications, so borrowing can be more challenging for some people, especially those in the low-income bracket. The amount of money anyone can borrow has been set at 20 times the salary or the total income of the borrower. "Banks and finance companies must make sure that this limit is not exceeded," the Central Bank said in its circular.
Repayment
Borrowers have up to 48 months to repay personal loans. To keep monthly instalments and interests reasonable, banks have to ensure the repayments don't exceed 50 per cent of a borrower's gross salary or regular income.
So, if your objective is to convince a bank to grant you a loan, you'll have a tough time unless you meet the requirements of both the lenders and the Central Bank. "Anyone not complying with the rules of the UAE bank is not going to get a loan," notes Gregory.
"Banks have their own rules about salary size and age of borrowers for example, and if your profile does not fit, they will not lend to you. It's not about presenting your case for a loan, but rather about meeting the requirements of the bank."
But the more information and clarity that you can provide to your bank, Musty says, the smoother the process will be to apply for and receive the result of a loan request. "It is important to have regular conversations with your relationship manager to ensure that you are on top of your finances and that they are being managed in the best possible way."
Watch out for interest rates, charges
If you really need to take out a loan, it is critical to shop around to get the best deal possible.
Taking the first loan offered can result in paying a higher interest rate than needed, and make the purchase more expensive.
Go for fixed interest The first thing to do is check if the interest payable is fixed or flexible. Gurnos Stonuary of Nexus Group warns that if the loan has flexible interest, monthly payments may rise when the interest rate rises.
Keep it short Always aim to have a loan for the shortest possible period, because the longer you take a loan, the more interest you pay. Don't get tempted when lenders offer to extend your loan amount over a longer period.
"This can look inviting as it will reduce your monthly repayments, but beware the longer the loan, the more interest you will have to pay overall," says Stonuary.
Don't pay it off soon
However, if you decide to pay off your debt before the end of the loan period, watch out for a redemption charge.
"Consider also consolidating any loans you have such as credit card loans, overdraft into one loan where you may be able to save on the interest that you pay and to have a single set amount to pay each month," he adds.
