If you’re looking for personal finance in the UAE, you certainly won’t be short of options. If you want to make sure you’re not going to be hit with unexpected charges, restrictive clauses in the fine print or loopholes that might leave you out of pocket, take a look at this list of factors you need to consider before signing up.
Is your interest rate flat or reducing?
When you’re comparing rates to work out the best deal, it’s worth doing your homework so you know what you’re being offered. Ambareen Musa, Founder of UAE financial product comparison website Souqalmal.com, says, “The most important feature of a personal loan, when you are comparing, is whether the rate is reducing or flat. “Some banks advertise reducing rates and others flat rates, and they are not comparable as they are calculated differently. So customers need to make sure they compare apples to apples.”
A flat rate calculates interest based on the entire loan amount without considering what’s already been repaid, whereas a reducing rate calculates interest
on the actual outstanding balance taking into account repayments already made. So, while an advertised flat rate might be lower than a reducing rate, overall you could end up paying less with a reducing rate.
Are you likely to repay the loan early?
If there’s a chance you could repay your loan early — perhaps with an end-of-service gratuity — it could pay to consider whether you’re likely to have to fork out a penalty for doing so and if so, how much. For example, Mashreq customers will be able to settle their personal loans prior to loan maturity with a penalty of 1 per cent of the outstanding loan amount in line with current UAE Central Bank guidelines, says Tooran Asif, Head of Personal Banking, Mashreq.
Some banks might even offer zero early settlement fees, says Musa, and Steve Lawton, Senior Consultant, Holborn Assets, reckons this would be a worthwhile
deal. “If you can repay it in full sooner without penalty, you’ll save a great deal of interest,” he says.
Bear in mind the source of funds for repayment may have a bearing on the charge levied; if you’re refinancing with another bank, the amount may be higher.
Might you need a payment holiday?
There are times when finances can be particularly tough; festive seasons, an unexpected wedding or the new school year. If you can foresee a month or two when your budget will be tight, consider a bank that will offer you a payment holiday if you really need it. A quick scan of personal loan features across UAE banks shows most, if not all, will allow you to defer a payment from time to time, as long as you apply in advance and pay the appropriate charges. “As per Central Bank guidelines, Dh100 will be levied per postponement [for Mashreq loan customers],” says Asif.
Is there a chance you could be late with an instalment?
Many of us are familiar with the worry that sets in if salaries are late or expected payments into accounts don’t materialise. But, if you have payments scheduled to leave your account, such as loan repayments, what happens if you don’t have the funds available? Understandably, your bank isn’t likely to
ignore it, penalties are regulated you can expect to face a charge. “There is generally a late payment fee from all banks, unless you negotiate with them and
there are some special circumstances in which banks can waive the fee,” says Musa.
Will you be charged set-up fees for the loan?
When you’re working out how much you can afford to borrow and over what period, bear in mind you’ll have to factor in extra outlay at the start. “There is an arrangement fee or upfront fee that banks normally charge to set up the loan for you, [usually] 1 per cent of the loan amount,” Musa explains.
Could you need a top-up?
If there’s a chance you might need to top your loan up at any stage, remember you may well incur further costs to do so. Asif says current Mashreq loan conditions involve a fee of 1 per cent as early settlement on the outstanding loan amount along with a processing fee of 1 per cent on the top-up amount.
However, don’t rely on being able to top up your loan as a matter of course. “Topping up [a] loan is sometimes available, depending on your circumstances such as current debt, repayment history, etc.,” explains Musa. “But the bank needs to make sure the extra loan you want will be repaid in full.”
Will the bank insist on your having insurance in case you lose your job or die during the tenor of the loan?
While insurance can give you peace of mind that your financial obligations will be taken care of should the worst happen, they add to the cost of borrowing. When you’re considering how much to borrow and over how long, find out if your bank insists on you taking insurance to cover your outstanding loan if you’re no longer able to make repayments. “Credit shield is commonly offered with personal loans, but you must read the small print [as] there are so many clauses,” Lawton says. “The individual needs to consider if it’s worth paying the extra each month.”
Will you change your salary payment to another bank?
If a change of banks is on the cards, you might want to check your bank’s policy on loans for non-salary account holders. “Many loans have a clause that states salary payments must be made to an account with the same bank,” says Lawton. “Change banks or stop receiving a salary and the bank could demand immediate payment in full.”
