As with any financial service, it pays to do your research before you commit to borrowing money. In the long run, this could mean a better annual percentage rate (APR), lower fees and significant cost savings over the duration of the repayment schedule.
“Shopping around is always important, but pay extra attention when you are looking to borrow money,” says Keith McCarthy, private client adviser at wealth management firm Credence International. “This is because there is so much choice available to today’s consumers, and it can be difficult to settle on an option.
“Every person’s circumstances are unique, and a one-size-fits-all approach will not work. You’ll need to find a solution you can afford, understand and trust.”
Don’t fall for gimmicks
Special offers and deals that seem too good to be true are often just that, says Max Durrant, Senior Associate at Holborn Assets, a financial services company. “However good the loan looks, it’s always sensible to look around and negotiate rates with lenders,” he says. “Gimmicks colour judgement and distract from the main focus of borrowing and repaying within terms, so focus on the APR and finance charge.
“An initial rate that looks attractive may have large increases after the introductory offer period. If you cannot get a loan with a commercial lender, then it’s probable that you should not be borrowing. And remember that defaulting on a loan in the UAE has criminal consequences.”
Read the small print
According to a recent independent poll by Opinium, a service-oriented online market research agency, only 27 per cent of people read the terms and conditions for bank accounts, loans and credit cards, with less than a fifth of that number saying they fully understand what they’ve read.
“All conditions should be crystal clear and unambiguous, so if you’re unsure, double-check,” advises Durrant.
“Ensure that you know exactly what you will be paying back in interest,” says McCarthy. “In the UAE, interest is expressed as a flat rate or floating rate, so always check the APR, which is a true reflection of the actual interest you will be paying.”
Another thing to factor in is early repayment charges, he adds. “If you believe there’s a chance you will pay the loan back earlier than expected, then factor in any early exit fees.”
Cheapest ain’t the best
Don’t go for the cheapest instalments with blind faith; instead, take time to calculate the true cost of borrowing, which includes the loan amount, the length of the loan, repayment frequency, interest rates and fees. “It is also essential to understand the financial guidelines the bank will follow in altering rates,” says Durrant. “A low interest rate that is not fixed can change, and a fixed rate can also change after the initial fixed period.”
McCarthy concurs, adding, “Ensure that whoever is advising you on the loan can take you through all the charges in detail and explain the total cost. If at this point you are still not aware of the costs and any potential outlay further along the line, then you are not getting the best advice and should look at alternative options.”
Shorter-term loans generally mean that you’ll be paying less interest, but the size of the monthly repayments will be larger. Vice versa, a longer-term repayment schedule will see you paying smaller monthly sums but more in overall interest on the amount you borrow.
“While reducing the amount of interest you pay is definitely something you should take into consideration, my advice is to make sure you can agree on a payment schedule that you can comfortably afford,” says McCarthy. “Having manageable contributions will leave you with greater spending flexibility and protect you during any lean months that may come around.”
Durrant agrees. “If your budget cannot stretch to higher repayments, but the need for the loan is still there, it makes sense to find a figure that is within budget,” he says. “While this may be over a longer term, at least you’ll know it’s within your means.”
Before you apply for a personal loan, consider other forms of borrowing such as a credit card. It could be a quicker, cheaper and more convenient option for instant finance if your need is immediate and you intend to make fast repayments, says Durrant. “However, credit cards often have very high APRs and their accessibility can lead to the temptation of continuing borrowing up to the credit limit, repaying only the minimum. The cost will always be higher in this case.”
For expats, credit cards in the UAE often have very different terms in comparison to those back home, says McCarthy. “Most expats will be familiar with lengthy interest-free periods in their home country,” he says. “However, in the UAE, there are very short interest-free periods, usually around 50 days.
“My advice would be to look at the potential cost of a credit card and see how it compares. “However, you will most likely find a loan to be the better option over the medium to long term, plus there will be a clear repayment schedule to follow without the temptation to buy something you don’t need on credit.”
Depending on your circumstances, a slightly larger loan amount could mean a lower interest rate. If you have a number of tasks that require funds, one loan from a sole provider will be easier to manage than borrowing from a number of sources, and it will have the benefit of only one set of charges, says McCarthy.
However, sometimes the loan amount may need to come from different sources for a number of reasons, says Durrant. “You may be able to collateralise part of it but not all [or] find an attractive rate with a lender that is capped, but your needs are greater. If you can find a solution from a combination of lenders that works out cheaper, then go back to your bank and see if it will offer competitive terms with one loan.”