Dubai:  About half of expatriates in the UAE have personal loans to settle, while nearly four in ten (38 per cent) have credit card borrowings to pay off.

Household debt, indeed, remains a perennial problem in the UAE, and what is worrying is that it can push people to the brink of frustration. To provide a relief to debt-laden consumers, banks are offering borrowers a chance to opt for a “debt consolidation loan.”

Consolidation loans allow those who have racked up multiple debts, especially the ones who are neck-deep in credit card dues, to lump all their borrowings into a single loan with lower annual interest rates and manageable monthly instalments.

But while this type of loan may sound like a quick solution to those who are behind on their payments, UAE residents are strongly advised to exercise caution.

According to financial analysts, a borrower could end up spending more on loan repayments and buried deeper in debt if they are not mindful of their monthly dues and day-to-day expenses.

According to the National Endowment for Financial Education in the United States, consolidation loans typically have a longer term, so borrowers can have affordable monthly payments.

“What many people do not realise is that the stretching out of the loan term leaves them with a greater overall debt burden, which must be endured for a longer time.”

“For example, a five-year loan for $20,000 at a 10 percent interest rate would have a consumer paying about $425 monthly and owing total interest of $5,496. Extending the loan length to 15 years would knock down the monthly payment to $215, but it would increase the total interest to $18,685.”

SS Raju, personal finance expert at Nexus Group, also warns that with the new Al Etihad Credit Bureau now enforcing the debt burden ratio, it may be difficult to convince a bank in the UAE to lump all the borrowings into a single loan.

Under the current set-up, financial institutions now have access to credit information of borrowers in the UAE, making it easier for them to establish if a loan applicant is in a very difficult financial situation.

“This means there is no hiding from personal debt – it’s shown in full to the banks in the UAE, giving them a clearer picture of any understanding loans a customer may have,” adds Jon Richards, CEO of compareit4me Group, which runs a finance comparison site in the UAE.

Raju, however, points out that with credit card debts racking up 40 to 50 per cent per annum in interest liability, it may be worth pursuing a consolidation loan. “If you take a personal loan, the annual interest rate is likely going to be between six to nine per cent,” he says.

“Therefore, you are facing drastically less interest liability if you go with a debt consolidation loan as opposed to allowing the interest to pile up on your credit cards.

“You can also spread out the loan over a longer period of time so that your debt servicing goes down and your cash flow improves. “

Raju says “it is absolutely critical” that a borrower who signs up for a consolidation loan is disciplined in that, all  existing credit cards are terminated and applying for new ones should be avoided at all costs.

“This is a crucial step to ensuring this or any method is effective, so that you do not take on fresh debt.”

Richards observes that debt consolidation has been gaining popularity in the country. “Until recently, it was a little known concept, but more and more people are becoming aware of the advantages of having just one regular payment to manage on a monthly basis, as opposed to juggling many”

“Not only is one payment easier to deal with on a personal level – the stress involved with dealing with just one payment is much lower than when many are in the mix.”

He agrees that the interest rates attached to debt consolidation loans are indeed often much lower than those for credit cards and other loan options.

“Banks have reported a dramatic increase in the amount of customers who are trading in their 36 per cent a year interest credit card and applying for consolidation loans which can be as low as eight percent interest,” he says.

In order to make consolidation loans work for them, borrowers should not just make an effort to stick to the full monthly repayments and avoid accumulating new debt, but also to curb their day-to-day spending.

“For expats, it’s important to remember that while your salary may be more than what you were receiving in your home country, as well as being tax-free, the cost of living in the UAE is high. To stay out of the cycle of debt in the first instance, reign in any extravagant spending, calm down on the over indulging (however tempting it may be) and keep a track of all spending,” says Richards.

“Having a personal budget and sticking to it will ensure debt is avoided.

However, it’s important, if you do find yourself getting into debt, to take action immediately. Don’t let it drag on and get worse. Consolidation loans, of course, are available and always a viable option. As long as payments are made in full and on time they can be a positive solution.”