Despite successive interest rate hikes, UAE residents still retain their appetite for loans, whether to buy assets or pay back existing debts. Image Credit: Shutterstock

Dubai: Banks in the UAE are extending no-instalment periods of up to 3 months as incentives on new loans to offset concerns applicants have about high interest rates and EMIs. A majority of the bank loan schemes promoted during Ramadan have this and cash-back as central to the offer.

Not just that, the UAE banking sector is making it easier to procure new loans. The minimum requirements to get a new loan approved are a Debt Burden Ration (DBR) that is less than 50 per cent (maximum permitted by the UAE Central Bank) and a credit score over 580 points.

Read more

The Etihad Credit Bureau has even struck a collaboration with Nova Credit that enables new residents to transfer the credit history from their home country when availing of financial services in the UAE. Until now, this would have been extremely difficult for new expats to tap a swathe of banking services.

“Though banks follow due diligence before granting loans, at the end of the day, they want to sell products,” said aid Shivansh Rachit, founder and board member at Hedge and Sachs. “Unless a customer has a poor credit score, loans are still comparatively easier to procure in the UAE. “Some borrowers take loans as it helps give them additional liquidity to build assets. It is just as easy to avail credit instruments in the UAE - you get calls from credit card and personal loan salespersons almost daily.”

Even as lending rates continue to rise, there seems to be no slowdown in consumer appetite for credit instruments. Bankers and personal finance experts have said small-ticket personal loans ranging between Dh100, 000 to Dh250,000 and motor loans are among the most popular among salaried employees (despite high motor insurance prices).

No wait-and-watch

Contrary to what some analysts are saying, there is no wait-and-watch approach being adopted by UAE residents on taking out loans/mortgages. For one, there is no guarantee that interest rates will drop in the coming months.

For customers with incomes of over Dh10, 000, banks are handing out secured loans (against salaries) at lower interest rates (under 3.2 per cent), said Prabhakar David, CEO of Inflow Financing Broker. The most popular personal loan sizes are for under Dh250,000. Residents opt to take personal loans for multiple reasons – for education purposes, a home purchase in their home country, or to pay off existing loans. An official with a Dubai-based bank said, “There is high demand for car loans (despite rising insurance amounts) as car dealerships launch attracting packages during Ramadan.”

Variable-rate loans less effective

Although variable-rate loans can be more cost-effective in the short term, this situation may not last if interest rates continue to rise. And at a time of multiple rate hikes, UAE credit consumers are better off locking into a fixed rate loan.

“The issue with variable interest rate is that it becomes difficult to speculate changes in interest rates towards the end of the year,” said Rachit. Variable interest rates make it harder for people to budget as payments fluctuate wildly, and consumers could end up in financial distress if interest rates spike. The 12-month Emirates Interbank Offered Rate (Eibor) - or the benchmark interest rate for lending between banks within the UAE - was at 4.9 per cent.

New expats in the UAE have it easier in tapping banking services, including loans, after a recent initiative by the Al Etihad Credit Bureau.

UAE banks offer expats loans for a flat rate of 3.14-3.58 per cent (with salary transfer). Depending on the bank, interest rates are much higher for personal loans without the salary transfer option (5.43-8.8 per cent). George Howard, Chartered Financial Planner at The Fry Group, recommends that UAE residents lock into a fixed rate if they have to take a loan. “Moreover, loan seekers need to be mindful of the fees banks charge for taking loans,” he said. “Many banks charge arrangement fees, admin fees, etc..”

For consumers seeking fixed rates on motor loans, banks offer interest rates starting from 3.75 per cent up to 9 per cent on reducing balance per annum and remain unchanged for the loan tenor. Variable interest rates start from 3.74-6.75 per cent on reducing balance per annum and may vary based on EIBOR rates.

Keep checking AECB score

Regarding repayment options, loan seekers typically opt to schedule their repayment at fixed interest rates for two years and floating for the remaining two- to three years. Bankers have warned loan seekers to keep their debt service coverage ratio (DSCR) low and their Al Etihad Credit Bureau score high to avail flexible repayment options. “Outstanding utilities and EMIs must be paid on time to ensure a high credit score,” said a banker. Borrowers also need to check how much more they would have to pay if they want to repay their loans earlier. “Always try making extra payments to see if you can repay sooner,” she added.

*(Rates are indicative)

What are high networth individuals doing?
The wealthy may be rethinking whether or not to take loans due to higher interest rates. The reason for that is that HNWI often borrows to leverage investment portfolios. “I do not advocate taking loans for liquidity as the interest from banks doesn’t offer much in terms of returns,” said George Howard of The Fry Group. “That being said, home loans are still popular among this category of investors as they are tired of paying rent.”