When the global financial crisis hit in 2008-9, Dubai was among the worst hit. Thousands of people lost their jobs. And with this came a flurry of media reports of indebted expatriates fleeing to avoid creditors. While the emirate is in better shape today, many have not learnt the lesson from six years ago and too many UAE residents remain financially stricken. If you are struggling with a mountain of debt, don’t panic and do nothing. Here are a few tips to follow to manage debt:
Don’t ignore debt
“If more than half your monthly salary goes in paying debt payments, you need to stop and think,” says Preeti Bhambri, Founder of personal finance website Moneycamel.com. The worst thing you can do is ignore the problem as it will ultimately end up getting worse. Debt in the UAE is treated very differently to the way it is in other countries and could result in a criminal offence, which may well result in arrest and a jail term. Dr Habib Al Mulla, Partner at legal firm Baker & McKenzie Habib Al Mulla, says hiding your head in the sand is possibly the worst thing to do. “Don’t avoid the problem — it is absolutely not advisable.”
Khalid Elgibali, Head of Retail Banking and Wealth Management — Mena, HSBC Middle East, recommends tackling the problem head-on if you are faced with escalating debt. “This prevents your overall financial situation from worsening.”
Make a list of what you owe
The first action bankers and financial advisers recommend is to make a list of obligations. It will allow you to determine how to proceed with making repayments in the order of their importance. “This will require you to look over the terms and rates with your banks and assess which are the priority debts that need to be dealt with as soon as possible depending on the level of their severity,” says Elgibali. Bhambri, also Managing Director of MOCA marketing management, agrees. “Once you’ve set aside cash for day-to-day costs, you can then meet bill and loan repayment demands in order of priority.” Pay off the highest interest debt first, she adds. “If you have multiple high-interest loans and/or cards, choose to pay off the one with lowest outstanding first.”
Track your spending
Once you have built a plan to deal with existing debt, it is vital to keep track of your spending to ensure that you limit the accrual of any further debt. “To this end, we advise establishing a monthly budget, detailing your required payments and daily expenses,” says Elgibali. “You can then organise your spending in line with a budget, and this will also help in identifying the areas where you can cut back to allot your income to other more pressing areas. Cutting back on these unnecessary costs will go a long way in bringing your finances under control.” Once you have organised your plan, you should be able to determine a daily allowance, as well as potentially identify how you can build your savings.
Think of ways you can bring money on the side, advises Bhambri. This can include anything from taking a second job to selling unwanted items to get some extra cash.
“Use the extra income to pay off your debt faster,” she says. “Take up a freelance job to earn more and keep you off unnecessary spending.”
Approach the bank
The sooner you start dealing with your debt, the sooner you will be able to pay it off. “Nonetheless, we do understand that this can be a complicated process, which is why we strongly believe that communication with your bank is key,” explains Elgibali. “Working closely with them will allow you to build a plan to effectively meet your obligations and to potentially consolidate all of your debts into one manageable payment solution.” Dr Al Mulla agrees. “The best is to approach the bank and try to reach a settlement,” he says. Normally, a bank will try and reach some sort of compromise. “They may suspend the interest repayments for a while, for example,” says Dr Al Mulla. “It all depends what is on the table — your income, your assets, for example. If you are going to pay over a longer term with some sort of guarantee. But at the end of the day, it all takes proactive measures.” Bhambri advises asking for a face-to-face meeting with your bank and requesting a payment holiday. “Explain the situation and ask them to extend the loan period if possible,” she says.
Avoid repeat mistakes
It is important to recognise that not all debt is bad, and that taken in moderation, it can be helpful. Debt that is managed carefully can help people meet their ambitions and important life goals, such as paying for your children’s education or a wedding. “The key is to wisely manage the money you borrow and ensure that your finances remain under control,” says Elgibali.
“If you are going to pay off your debt, you need to be honest with your creditors and yourself,” says Elgibali. Be upfront with the bank to give them the best opportunity to help you, he says.