Personal loans are easy solutions to all cash flow problems, be it debt consolidation, home repairs or refurbishing, replacing a car, paying off bills of purchases or any unexpected medical expense. However, it is essential to understand the fundamentals of bank processes in order to qualify yourself for a smooth and hassle-free loan that is right for your actual requirements.
Unsecured loans
These loans are unsecured and are popular among the salaried class to help meet various needs such as marriage, education and even a foreign vacation, says Siddarth Razdan of I Capital Management Services, a corporate finance advisor. Since they are unsecured, they are priced higher than mortgage or car loans, though they are cheaper than borrowings on credit cards.
“Personal loans are also available for those who are self-employed, but banks are not as aggressive in lending to the self-employed as they are to salaried employees with more predictability of cash flows. The focus of banks for personal loans is on the ability to repay with a margin of safety, i.e. after taking into account living expenses and existing loan repayments,” says Razdan.
Set the budget
Establishing a budget will help you determine whether you will be able to meet the minimum payment requirement. This can be calculated easily by deducting your monthly expenses from your monthly income. This will also help you control the loan amount you should apply for. A bigger loan for a longer duration may mean less monthly payments, but you end up paying more to the bank. Razdan says, “When borrowing from the bank, ensure that you borrow amounts you are comfortable repaying and based on your actual needs rather than amounts you are eligible
to borrow.”
Bank requirements
Mohammed Jamil Berro, CEO of Al Hilal Bank, says the minimum salary requirement for loans starts at Dh3,000 with a length of service of usually six months of confirmation or employment, whichever is earlier. These, however, vary from one bank to another.
“Banks will ask for a salary certificate (including length of service) and some banks also seek an undertaking from the employer that they will be intimated in case of cessation of service for any reason. Other relevant identity proof documents are also required, such as the labour card, Emirates ID and valid passport and visa copy. Banks also take into account the length of stay in the UAE, past borrowing history, employer strength, and bank statements while determining borrowing levels eligibility,” adds Razdan.
Steve Gregory, Managing Partner, Holborn Assets Limited, an international financial services advisor, says the employer needs to be listed with the bank in order for it to consider a loan to any customer. “There are a few banks that would not have this requirement but the interest rate is then frequently higher. Ask the bank for the rate charged for each type of loan,” says Gregory.
Types of loans
There are various kinds of personal loans, based on the individual’s needs and purpose. Berro says, “There are loans for education, rent and travel, and in such cases the funds received from the loan will be paid directly to the vendor/service provider. Usually the tenor of such finances may be lower as well.”
While you could walk into any branch of any bank or even just call up call centres to apply for a personal loan, loans should be avoided where the purpose is not known or where the purpose is to spend on luxuries. In such cases, a person usually loses interest in paying the instalments once the need for such a purpose is fulfilled or diminished.
Banks’ offering
Upendra Balchandani, Head of Product Development and Product Marketing, Consumer Banking, Commercial Bank of Dubai (CBD), says: “CBD offers personal loans to UAE nationals and expatriates residing in the UAE with a valid residence visa. The bank offers attractive interest rates on a reducing balance basis that remain fixed for the entire tenor of the loan and charge an upfront processing fee of 1 per cent of the loan amount, up to a maximum of Dh2,500 per application. The combined maximum monthly instalment of all loans should not be higher than 50 per cent of the borrower’s monthly income. The maximum repayment period offered for personal loans is 48 months.”
Fine print
Research thoroughly to understand bank lending clauses and the documentation you are required to sign during the application process. Gregory adds, “One needs to find out if the loan is charged at a flat rate, meaning x per cent for the entirety of the loan, even though payments will be reducing the outstanding balance.
“By learning the monthly repayment amount for the loan you require, you can compare costs for the loan with other banks. There is no other way to compare. Application fee structures are difficult to assess with so many banks, so therefore a monthly instalment comparison for the total monthly cost is the best way to find a good deal,” he says.
In addition, one should know what risks are involved in case of a failure to pay. “Banks take security cheques to secure their loans. Upon default, the bank may present the security cheque and when it bounces, they make a police criminal case against the borrower,” adds Gregory.
Banks often charge fees for insurance to cover the loan plus interest or profit rates, and in addition late payment fees where necessary. Gregory adds, “These mount enormously if you fall behind with payments. Legal fees will be added should you default. When paying off a loan early do not expect to see a full return of interest for the early repayment.”
After doing your research thoroughly, select the right loan for your needs and do not apply haphazardly to several lenders. During the bank evaluation process, it will not be healthy to have a lot of applications in a short period since this can jeopardise your creditworthiness with less chance of loan approval.
Why a loan gets declined
Berro says loans are declined for credit reasons where the customer does not meet the eligibility criteria as stated by the Central Bank of the UAE. He adds, “This includes the debt burden (total monthly instalments versus total monthly income), which if exceeds 50 per cent of the income shall lead to a decline. In addition to this, there are other reasons such as not providing proper proof of employment, incomplete documentation or showing a lack of creditworthiness by having return cheques in the statement.
“In case the decline is due to the eligibility criteria mandated by the Central Bank, you should try and consolidate or pay off any debts where the instalments are high and are leading to the breach of criteria. Additionally, you could approach banks to consolidate the loans to a single loan to reduce the instalment if possible. In cases where the rejections are due to creditworthiness, you should look at ensuring that a healthy bank statement is maintained and proper documentation is in place,” says Berro.
— GN Focus Report
