A man named Steve is smiling in his sleep. Apparently, this is because his monthly loan payments were reduced by Dh4,500. If the headline and picture are not convincing enough, this new advertisement from Abu Dhabi Islamic Bank (ADIB) spells out the bank’s offer in detail — take existing credit cards, loans, and other payments to ADIB Debt Settlement, for an interest rate of 4.99 per cent that will eventually reduce to a flat 2.65 per cent per annum.
“Need funds to make your dreams a reality? Now you can get up to Dh5 million against your property,” says Emirates NBD on its website. “If you own a property in the UAE, Emirates NBD offers you the most convenient way to get a loan by mortgaging your owned and unencumbered property.”
RAKBANK is very direct in its online messaging: “Is your outstanding credit card balance causing you pain? Are you suffering from a severe case of card ache? We have just the remedy.” Transferring outstanding balance from other bank cards comes with the offer of a 0 per cent interest for the first three months, and a monthly interest rate of 2 per cent thereafter.
Debt consolidation can typically take any one of these guises — a consolidation loan, a second mortgage or home equity loan or a balance transfer credit card — and it addresses the needs of a diverse target audience. Although the concept is just gaining ground in the UAE, several expatriates may already be familiar with it, and according to one bank, Emiratis have been quick to learn.
On its website, Mashreq explains its debt consolidation loan: “A single payment each month is more manageable than paying several debts at a higher interest rate. That is why so many Emiratis change banks and take advantage of our long-term debt consolidation loans.”
Consolidating your loans
Debt consolidation is the action of grouping all pending payments into one combined debt. So whether it is an outstanding car loan, a personal loan, an overdraft or a mortgage, some banks offer to merge all these debts into one single debt.
Many banks prefer to call the process refinancing, while some others call it liability settlement. For instance, Dubai Islamic Finance’s Liability Settlement Finance offers up to Dh3 million to Emiratis and Dh1.25 million for expatriates, allowing them to combine various financial obligations into one payment, at a Sharia-based profit rate (interest).
“Debt consolidation is a solution for customers who have racked up a lot of debt on credit cards, loans and overdrafts. It is a way out for defaulters, and will also work for those on whom the common sense of managing finances has finally dawned,” says Sandi Saksena, Sales Manager at Nexus Insurance Brokers and a veteran financial adviser.
“If you are going down the debt consolidation route, the bank will pretty much own you for as long as you are paying off the debt. But it is better to have one owner as it is easier to meet your financial obligations.”
The balance transfer credit card
Many financial advisers view a transfer balance credit card as a practical way to consolidate debts. “If you have credit card balances, review the interest rate that you are being charged. Presently, many banks are charging up to 3 per cent per month on balances, which equates to an interest rate of more than 30 per cent per annum. If you are not repaying your balance on a monthly basis, this is a very high interest rate,” says Sarah Lord, Wealth Planning Director at Killik & Co (Middle East and Asia).
“Shop around to see whether you can get a lower interest rate with another bank, and transfer the balance from your existing card to that new card.”
Although an equity release financing loan is not always used to pay off debts, banks in the UAE are now offering packages to homeowners, allowing them to borrow money by using their current property as collateral. The bank basically lends an amount based on and secured by a property owned by the borrower. From the bank’s perspective, it has collateral from the borrower in the form of a completed property, and can offer favourable interest rates on account of the lower credit risk. From the customers’ perspective, capital can be unlocked from an existing property to purchase a second one — or simply pay off mounting debts.
A simpler mortgage refinance may also be an ideal solution for debt consolidation. Abu Dhabi Commercial Bank’s (ADCB) Refinance Mortgage Services allows borrowing “against the increased value of your home, to reinvest in another property or use the cash for other purchases.” The loan is available for up to 70 per cent of the mortgage value, and a repayment period of up to 25 years.
For those with existing mortgages, this is a good time to consider refinancing. “Banks are giving very competitive offers to attract clients from other banks,” said Chandrakant Whabi, CEO of Acrohouse Properties to Gulf News in July. “Clients should make use of this window and reduce the cost of their mortgages, especially in cases where banks are waiving the processing fees for loans that are being transferred.”
“Those who have taken a higher loan-to-value (LTV) can now shift their loans to a lower LTV based on the new mortgage cap,” said Whabi.
Caution and prudence
Lord advises everyone to repay debts before saving or investing. “When working out what you spend, make sure you include any debt repayments.
“You can then work out your surplus income and use this towards reducing your debts.”
The last word on debt consolidation is the soundest: “Don’t wait till you are desperate to go looking for a solution for your ballooning debt,” says Saksena. “If you have outstanding payments, and have stretched yourself towards meeting financial obligations, now is the time to go shopping for a consolidation.”