Personal finance: Your guide to UAE banks, interests, loans and loan payments
FAQs on how to switch banks or close bank accounts without hassles
FAQ#1: What are the types of bank accounts?
When opening a bank account in the UAE, a resident can choose from a current, savings, corporate and investment accounts.
Current account
A current account is mostly used for routine financial transactions. You will be issued a debit card and a cheque-book. The account can be used to receive salaries and can be maintained in several currencies, such as USD, GBP, Euro, AED, etc.
When opening the account, you have to opt either for a current salary account (monthly salary is transferred to this account), or a current account (it requires minimum balance, mostly for business).
In the second option, funds can be transferred to the account whenever you want, without having to do it every month like in a salary account. This is particularly useful if you are a businessman.
For current salary account, the bank decides the minimum salary required for an applicant to be eligible to open an account. This can range from Dh3,500 to Dh5,000.
Savings account
Savings accounts usually offer higher interest rates than current accounts. It can be fixed or variable interest. Savings account too can be operated in different currencies, and can receive salaries. If the salary is too low, companies tend to open savings accounts for their employees.
Corporate bank account
Often referred to as business accounts, corporate bank accounts are used by businesses to hold their money. They can be used for investing, saving or for a company’s routine financial needs.
The requirements vary, but the presence of a significant shareholder or director is typically required. To open a bank account, the application must be supported by detailed company records, which can include proof of business, like contract and invoices, as well as information about the company’s clients and suppliers.
While opening a savings or current account takes up to 3 to 4 working days, corporate bank account opening may take anywhere between 5-6 days to 3 to 4 weeks.
Investment account
Investment accounts generally offer higher interest rates than current or savings accounts, but access to funds may be limited or unavailable for a certain period. So if you need regular access to funds, investment accounts can be inconvenient.
The account is opened based on an investment contract with the bank. The term of the contract varies from between 12 months and can go up to 5 to 10 years or more. As per the contract, you transfer a certain amount of money into your investment account, and the bank manages your portfolio and invests in various financial instruments, allowing you to earn from 3 to 7 per cent per annum.
The minimum amount for investment also varies. Some banks require a fixed amount at the start of each year, while others require a monthly transfer of a fixed amount.
The investment account is not displayed in the digital banking portals. This is an intrabank account, managed solely by the bank. Every quarter, the bank sends a transcript from the investment account for review.
An investment account is an option if you wish to multiply the savings, and receive higher returns on your investments. You can look at it as a long-term investment, where you will be able to use funds in future, especially when you retire.
FAQ#2: Types of interests and how to avail them
Banks in the UAE offer personal loans based on two types of interest rates — flat rates and reducing rates.
Flat interest rate
The interest and sum payable on a loan is calculated at the start of the repayment schedule and does not change until the loan has been paid off. This ranges between 3.03 per cent to 7.7 per cent.
For example, a loan of Dh12,000 taken for 12 months means payments of Dh1,000 every month (without interest). Add the flat rate of interest at 5 per cent, which equals Dh1,050 per month (with interest) for 12 months, which means a total interest payment of Dh600.
Reducing interest rate
Here the interest reduces every time the borrower makes a payment on the personal loan. Reducing rate of interest considers the reduction in the principal amount after each instalment is paid. The interest percentage (which remains the same) is charged on the reduced amount, every month. This results in different instalment amounts each month. The interest ranges between 5.5 per cent – 14 per cent.
Interests rates for mortgage or home loan
For a mortgage or home loan in the UAE, the choice is between fixed and variable interest rates.
Fixed-rate mortgages
Most banks offer fixed-rate mortgages, where the rate of interest payable on the amount you’ve borrowed is fixed for a period. In the UAE, fixed periods tend to be between 1 and 5 years. At the end of the period, your interest rate will ‘revert’ to a higher rate, which is often a fixed margin above the EIBOR rate or the bank’s base rate.
ADVANTAGES: When the interest rate is locked in, you are unaffected by rate increases. It will allow you to accurately calculate your monthly mortgage payments and budget effectively. Fixed-rate mortgages are a good option for shorter terms, as you will not have to pay the higher reversion rate for too long once the fixed period ends.
DISADVANTAGES: If the bank’s base interest rate or the EIBOR rate falls, you won’t gain during the fixed period. A more extended fixed period means less competitive the rate. And the reversion rate at the end of the fixed period is often high.
Variable-rate mortgages
For this, the interest rate usually linked to 1, 3 or 6 months EIBOR throughout their duration.
ADVANTAGES: It’s suitable for medium- and long-term mortgages as you can avoid the high reversion rate at the end of the fixed period. You’ll also be able to take advantage of any decreases in the bank’s base rate or the EIBOR rate.
DISADVANTAGES: If the EIBOR rate rises, your interest rate too will increase. Since the interest rate can change, your monthly repayment amounts also can change, making budgeting difficult each month.
Other interest rates that affect your finances
Annual Percentage Rate (APR)
It is the annual rate of interest applicable on a loan. Credit card companies often use APR to set interest rates when consumers agree to carry a balance on their credit card account.
The rate is calculated by multiplying the periodic interest rate by the number of periods in a year in which the periodic rate is applied. It does not indicate how many times the rate is applied to the balance.
The APR includes not only the interest on the loan but also all fees and other costs such as broker fees, processing fees or even loan insurance which is built into your equal monthly instalments (EMIs).
Simple Interest Rate
It is a rate banks commonly used to calculate the interest they charge borrowers. Like APR, the calculation for simple interest is basic in structure.
For example, let’s say you deposited Dh5,000 into a savings account that paid a 1.5 per cent for three years. The interest you earn over three years would be Dh450. Simple interest does not compound, meaning that an account holder will only gain interest on the principal, and a borrower will never have to pay interest on interest already accrued.
Compound Interest Rate
With compound interest, the loan interest is calculated on an annual basis. Lenders add the interest to the loan balance while calculating the next year’s interest payments on a loan, or what accountants call “interest on the interest” of a loan or credit account balance.
FAQ#3: The benefits and drawbacks of bank payments
Bank payments include digital payments — internet banking through a website or online portal, or using your debit or credit cards. Other modes include cheques or cash.
Cash payment
The benefits include instant access to money (liquidity) and no transaction fees like the credit cards. It also minimises bookkeeping, which means fewer hassles.
Downsides include the risk of losing it or being stolen. It also means frequent trips to the bank for deposits, which requires time and money.
Cheque payments
People over the age of 40 tend to be more comfortable with cheques than credit cards. Cheques allow for mailing payments and receiving invoices.
Cheques can now be processed electronically at the point of purchase like a credit card but cost less to process in most cases. Unlike a credit card that comes with an annual fee, cheques in most cases are a free facility that come with current accounts.
Retail cheque payments are less popular in the UAE. A cheque doesn’t guarantee payment. Bounced cheques can even cost you. Depending on your bank, they may assess fees for bounced cheques.
Customers can put stop payments on cheques, close their accounts, and even post-date cheques if the receiver is not paying attention. All these delay payments.
Digital banking — credit cards, mobile wallets
Credit cards are becoming the most common method of payment since they can be used in most places. Studies show consumers who pay with credit cards spend more than if they were paying with cash, which is why businesses that accept credit cards have increased sales.
Besides increase in cash flow, credit card acceptance creates legitimacy for vendors. But it adds another level of difficulty in bookkeeping and adds to the monthly expense in most cases. Surcharging products can alleviate the costs associated with credit card acceptance.
Credit cards come with risks such as chargebacks and fraud. But security steps like EMV and PCI Compliance offer protection from fraud. Additionally, finding a reputable processor who can help with tokenisation and encryption is important.
They are more secure than traditional debit and credit cards, because account information stored in cards is encrypted uniquely each time it is accessed. Traditional debit and credit cards have magnetic strips that store data statically.
PCI, or payment card industry, compliance refers to a set of standards businesses follow to secure and protect credit card data provided by cardholders and transmitted through card processing transactions. Any business that processes, handles or stores credit card data on behalf of a merchant is required to be PCI compliant.
Refunds on credit cards are not immediate. A credit card transaction may only take seconds, but the reversal or refund is not as fast. Several steps are required for issuing refunds, and it happens in 2 to 30 days, depending on the factors.
Mobile wallets are the newest craze with Apple Pay, Samsung Pay and Google Wallet blazing the trail. Some accept loyalty programmes, and only certain types of cards are accepted.
Mobile payments are secure. The POS system does not have access to the full card number, so malware cannot steal the information. Apple Pay does not store your card information. Since the payments are contactless, it’s well suited to the current pandemic scenario. But it requires NFC equipment. No NFC hardware means no mobile wallet payments.
FAQ#4: Do loans in the UAE benefits expats — Myths and Truths
Why do people in the UAE take loans? It eases the financial burden and provides cash when you need it. Taking a loan in the UAE has some definite advantages.
Sharia-compliant profit or interest rates
Most expats take loans from UAE banks to resolve financial issues in their home country because of the lower Sharia-compliant profit rates. But Sharia-compliant financing is not always cheaper. In most cases, the difference might be only in the name. Profit rate or interest rate, finally what matters is the cost of funds.
For non-resident Indians, interest rates on personal loans in India can be as high as 15 per cent, averaging around 10 to 11 per cent per annum. In the Philippines, an Overseas Filipino Worker (OFW) may have to pay as much as 25 per cent or more as interest a year. This is in addition to a common requirement of having a direct relative in the Philippines as co-borrower for the loan.
In the UAE, per annum profit rates are lower and more reasonable. You can get an unsecured loan for a fixed interest rate of 5 per cent or lower.
A fixed rate of 5 per cent works to 9.25 per cent on reducing balance basis. Even then, the rates are lower compared to emerging markets like in India and the Philippines, where currencies tend to depreciate due to weak economic fundamentals.
READ MORE: UAE BANKING HISTORY
In the UAE, the currency is pegged to the dollar and is backed by strong external balances and current account surpluses. But a borrower in dirham should ensure that he/she has sufficient future income in dirham or any other strong currency to repay the loan.
Or else, the borrower will be saddled with two types of risks: currency risk and interest rate risk. Currency risk kicks in when his domestic currency weakens, and the debt burden becomes big in terms of the domestic currency. Interest rate risk can be very real if we are going through a rate hike cycle. Dirham’s rates are directly linked to the US central bank rates and interbank rates. When these rates go up, the rates offered by local banks go up too. These movements always need not be proportional.
The local rates are a function of factors such as the cost of funds to local banks, overall liquidity in the system and the loan demand.
So, for example, borrowing in the UAE to pay for an asset in India depends on factors such as interest rate outlook for the loan period, currency outlook, the potential appreciation of the asset and the inflation outlook. What’s vital is the ability to earn hard currency during the loan tenure.
The concept of real interest rates, nominal interest rates and inflation should be understood before taking a loan to finance an asset or invest in a country that is susceptible to volatile exchange rates. A quick and easy loan need not be always cheap and viable. It depends on many factors, as explained above.
Advantages of easy, early repayment
Since loan repayment is tied to incoming salary, strict auto-debit facilities can be utilised. Banks also tie in salary payment dates to ensure on-time repayment along with a grace period of up to a week for some banks.
Having a loan can be a mental struggle for some people, and an early repayment strategy can help put them at ease. In most countries, early repayment of loans comes with fees which can be a damper.
In the UAE, full early repayment is easier as the law states that banks cannot charge more than 1 per cent of the principal loan amount or Dh10,000 (whichever is lower) as prepayment charge. So, if you have a Dh50,000 loan and want to pay off the last Dh10,000 with money you saved up, the UAE bank cannot charge more than Dh100 as fees for early settlement.
Consolidation of debt
Many UAE expats take loans to pay off burgeoning credit card bills or other debts. Banks propose loans when customers look for an easy way to pay outstanding credit card bills. This could help consolidate debt and repay the loan in affordable monthly instalments without the high penalties levied on card payments.
FAQ#5: How to switch between banks?
With some planning, switching banks isn’t a terrifying experience. Follow these steps to ensure that your account is closed with fewer hassles and banking fees.
Find a new bank
Open an account in your new bank before closing the old bank account. If you close your bank account and then start looking for a new bank, you won’t be able to write a cheque, transfer money or pay a bill easily.
Automatic payments and recurring transactions
Since some payments and recurring transactions are automated, consumers leaving banks will have to re-establish that automatic flow of money. In most cases, the transition only requires you to change the bank account number.
Review bank statements for the past six to 12 months to identify automated transactions that need to be rerouted to your new bank. These include rent payments, bill payments, direct deposit and automatic fund transfers. You may also find infrequent transactions that draw from your old accounts. It will need two to three weeks for these transactions to shift to your new bank account.
Transfer money to your new bank
After confirming that automatic transactions have been rerouted, you can begin to move your money to the new bank. This can even be done without informing the old bank that you plan to close the account. Take note of any withdrawal or transfer limits if there is a large amount of cash in your old account.
Close the account and request a closure letter
Once the money is transferred, you can ask the bank to close your account and request a written letter of closure. You may need to visit the bank to fill up the account closure form, call a customer service or submit a written request. If you haven’t moved out your money, you will receive the balance in the form of a cheque.
If your account is dormant, you have to first activate and close it before submitting the closure form.
Many consumers complain of “zombie” accounts. That occurs when a bank reopens an account because a company attempted to draw money from it. Closed accounts may be reactivated because of billing errors or when customers forgot about automated bill payment.
So it is important to request a written letter that states that your account is closed — just in case you have to settle any discrepancies in the future.
The bank will ask you to surrender your debit card and unused cheque leaves, if any, along with a signed letter or an application for closure of the account. Some banks also ask the account holder to destroy or hand over the debit card once the account has been closed.