When money gets scarce, most people run to banks for a quick cash injection. Between 2007 and 2008 alone, the UAE witnessed a massive growth in personal loans, which jumped from Dh146 billion to Dh424 billion, a whooping increase of 190 per cent.
And as loans pile up, so do credit defaults. An FNC committee report in 2008 confirmed there were about 10,000 people facing court cases or were in jail because of loan difficulties and defaults.
Failure to pay back a loan on time doesn't just mean facing hefty penalty charges or falling into a cycle of increasing debt that is hard to break out of. About a year ago, R.I, a former bank employee in the UAE, landed behind bars after defaulting on the repayment of a Dh290,000 loan.
The Emirati was unable to meet the financial obligation after a personal ailment forced him to leave his job.
Be careful
Stories like these may have discouraged other people to borrow money from lending institutions. But if there really is a serious need to get outside help, it is in your best interest to be cautious at all times. Even banks have promoted responsible borrowing, urging UAE residents to only borrow what they require and can afford to repay.
"It is in the best interest of the customer to only avail [himself of] a loan if absolutely necessary [or] to take only the amount they actually require and not any additional amount they can get, and to repay the loan in the fastest possible time," Niranjan Mendonca, head of retail assets at Mashreq, tells Gulf News.
"Customers need to consider the reasons why they require a personal loan as well as their repayment capacity prior to taking out a personal loan," adds Suvo Sarkar, general manager for retail banking at Emirates NBD.
Taking multiple loans is not recommended, as this can only lead to debt traps, and monthly repayments should not go beyond 50 per cent of an individual's monthly income, says Sanjoy Sen, Citibank's consumer bank head for the Middle East.
"Also, we advised customer to pay their instalments timely as this will save them from late payment penalties and will keep a good credit history for taking loans or credit cards in the future," he adds.
However, it's not advisable to always rely on lenders to assess your credit repayment capacity. Some may even be willing to lend to people who have little chance of meeting their obligations.
"In fact, banks may even use third-party companies, not bankers, who will sell you a loan for the commission they receive from the bank. Some of these may even bend the truth to ensure you get your loan," notes, Steve Gregory, director of technical services at Holborn Assets.
Borrowers are normally made to sign an undated security cheque when securing a loan. Banks use these cheques in the event of the borrower's failure to meet the loan payments and if they bounce, Gregory warns the consequences can be severe.
"Bouncing cheque is a criminal offence and an offender will be arrested and may be held on remand or sentenced to imprisonment if he is unable to pay the amount of the cheque [full outstanding balance on the loan] within days of the arrest. In such circumstances, people can lose their employment if they are on remand and cannot show or work, or be locked away until somehow the outstanding is paid," Gregory says.
Review finances
The safest course of action then is to review the state of your finances carefully before signing up for a loan. If you have investments somewhere, it would be safe to borrow up to 70 per cent of the value of the investments. If you have no disposable assets, borrowing money can be a dangerous move because you could easily find yourself in trouble if you suddenly lose your job.
If your repayment capacity is too weak and you don't have assets and a stable employment to boot, it is best to borrow from your family or friends to avoid serious consequences. Or try your home country banks. You are likely to get cheaper loans that way, too.
"It is dangerous to borrow. If you have debts equal to six months' salary, and no assets, you are on the road to ruin. Banks may lend you up to two years' salary or more, but you can't guarantee to repay them if you lose your job and fail to find another quickly. Please think long and hard before borrowing. Even if you can afford to repay, you should not be paying more than 30 per cent of your salary in loan and credit card payments," advises Gregory.
"Think of this. If you could not afford to save 30 per cent of your salary each month in the past, how are you going to afford to pay out that amount in the future on debt repayment? If you get it wrong, the risks of ending in prison are huge," he adds.
