Debt
Three in five UAE residents are weighed down by a sheer mountain of varying debts from credit cards to personal loans, home loans and auto loans. Image Credit: Flickr (For illustrative purposes only)

  • Law, debt and prison: Avoiding the trap cycle
  • Should I take a consolidation loan to pay off debt? Case study
  • Getting a debt consolidation loan in UAE and details of bank criteria
  • What about debt-restructuring?
  • What if I am not eligible? Other options

Are you struggling with debt? Here we look at some ways to take the stress away and get into a better place for the future.

Maybe you‘ve been a little too generous with your credit card or you rely on it to pay those big costs that come up once or twice a year, but you just haven’t got on top of paying them back?

The interest has crept up and before you know it, you’re in a worse place than before you had those bills. Or you could be a proud parent and you needed to take out a loan to help pay for school fees.

First of all, please know, you are not alone. Three in five UAE residents are weighed down by a sheer mountain of varying debts from credit cards to personal loans, home loans and auto loans. You simply had to have that 4x4 for weekend desert camping trips along with the latest phone providing you with the GPS function to get you there!

3 in 5 UAE residents are struggling with debt

Dubai life certainly doesn’t always come cheap, but you have to enjoy life, right?

You’ve got some debt to pay off — it’s really doesn’t have to be the disaster that’s lurking.

Firstly, let’s clear up the law, debt and prison

Something that has always added to people’s worries is the fear of defaulting on a debt or bouncing a cheque and facing a jail term, as has happened in the past. Dubai Courts decided that rather than imprisonment, they would start issuing fines for these offences which will give people the breathing space they need to get into a better position to manage their debts.

Good news also came in October last year, when the UAE cabinet announced they would introduce an insolvency law for individuals who found themselves unable to pay off their debts.

This was seen as a huge step forward for the UAE, especially where people who had miscalculated timings or found themselves in a jam for a month or two were suddenly facing a jail term, which would mean they were unable to work. As the head of the family, avoiding a jail term is crucial to continue working and paying off the debt, which would affect both the creditor and the debtor.

As the head of the family, avoiding a jail term is crucial to continue working and paying off the debt, which would affect both the creditor and the debtor

- Carla De Silvo

The new insolvency law now allows UAE expats (and nationals) in financial difficulty to get the support they need, with plans for the settling of debts put in place and most importantly protection from legal prosecution. (To read a step-by-step guide to the insolvency law, click here). There will likely be a travel ban imposed to avoid debtors skipping the country and leaving unpaid debt.

If you find you’re in a similar situation, there are steps you will need to take and documents needed to submit an application so you can gain the protection and support needed or have your funds liquidated to pay your debts. You should seek financial or specialist advice if you are in this situation.

So you’re in debt, you can’t afford your repayments and the interest keeps creeping up on the multiple cards and loans you’ve taken out.

What can you do to make a start and get back on track?

Just because you opted into various loan terms and interest rates over the years doesn’t mean you have to be stuck with them forever. You also don’t have to wait until you pay a loan off to have your burden lightened.

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Debt refinancing or restructuring can help make debt of any kind more manageable. Image Credit: Shutterstock

Loan consolidation and debt refinancing or restructuring can help make debt — of any kind — more manageable. Here’s when to consider debt consolidation or restructuring, two very different methods, and how each might work for your situation.

Should you consider a debt consolidation loan?

Many people only pay the minimum amount due on each of their debts every month. This can make it feel impossible to ever repay your debts. Debt consolidation loans can provide financial relief from your debts by lowering monthly payments - a single loan that rolls all of your debt into one monthly payment and one overall loan.

Essentially, a debt consolidation loan gives you enough money to pay off multiple debts.

And there’s one big perk to debt consolidation loans that makes them different: These loans often come with a reduced interest rate and a lower monthly payment. Which in theory means you should be able to pay off the loan quicker!

Case study - Total debt of Dh10,000

I had a British client who had four credit cards from three different banks as they had lots of dining offers and loyalty points that were attractive. He was paying off different installments on each of them every month. The outstanding balance on all the cards was around Dh10,000.

The rates varied on each card and one of the things that he didn’t realise was that the rate he thought he was paying each month was in fact only on the minimum monthly payment rate. The interest was actually compounding on the unpaid balances. This has left him with debt, which could take over a decade to pay off and on a hamster wheel of continual ever-increasing repayments.

The rates varied on each card and one of the things that he didn’t realise was that the rate he thought he was paying each month was in fact only on the minimum monthly payment rate

- Carla De Sivo

The average interest rate on the cards was 2.9 per cent per month, however this equates to an annual percentage rate (APR) of 40 per cent. Something that isn’t often advertised by the banks when promoting attractive credit cards.

He was paying off the minimum 5 per cent per month on each, which was leaving 95 per cent of the debt each month unpaid. If he stayed with this option he would have ended up paying about 2.5 times the original balance of Dh10,000.

As soon as we sat down to review his debts, it was clear he needed to pay off more than the minimum balance to ever get ahead. He would benefit from an immediate debt consolidation loan - one rolled up loan with one lower repayment.

Loan
One of the worst mistakes you can commit is to simply pay off the minimum balance. This will gave you a false sense of security that your debts are met each month. Image Credit: Stock photo

He has also realised that one of his worst mistakes was simply paying off the minimum balance, as it gave him the false sense of security that his debts were met each month when in reality they were creeping up. He upped his monthly repayments and eventually will be in a position where he can start using one credit card for purchases and pay the full balance off each month. We looked at some basic budgeting techniques and ways to increase his income over his expenditure.

Before any loan, first you must work out your Debt Burden Ratio (DBR).

What is debt burden ratio or DBR?

Your debt burden ratio is a very important factor, which is used by UAE banks to calculate your eligibility. As per a UAE Central Bank rule, your DBR ratio cannot go more than 50 per cent of your earnings.

For example, if your monthly salary is Dh20,000, you cannot be making more than Dh10,000 a month in repayments. In other words, you can only use half your monthly income to pay towards your debts.

50%


The highest limit permitted for your debt burden ratio in the UAE

Most banks offer online calculators where you can work out your DBR.

Banks will do a Credit Bureau check before lending finance to clients. This means they determine your DBR ratio by checking your current liabilities.

Of course, debt consolidation does come with its pros and cons and doesn’t suit everyone. You need to make sure you look at the final rate, APR (annual percentage rate) and repayment term to ensure you don’t end up paying more in the long run.

Which banks offer debt consolidation loans if my DBR is okay?

Emirates NBD

Minimum salary requirement: Dh10,000
Do I need to transfer salary? Yes
Maximum finance loan: Dh1,000,000
Arrangement fee: Yes, 1 per cent of the loan amount
Loan deferment option: Yes up to two installments a year, non-consecutive
Interest rates: From 2.88 per cent APR (annual percentage rate)

Mashreq Bank

Minimum salary requirement: Dh5,000
Do I need to transfer salary? Yes
Maximum finance loan: Dh1,000,000 for expats and Dh3,000,000 for UAE nationals
Arrangement fee: Usually 1.05 per cent of the loan amount
Loan deferment option: Up to 2 loan installment deferments per calendar year subject to bank’s approval
Rates: Dependent on individual applicant – personal loans from 6.49 per cent

Emirates Islamic Bank

Minimum salary requirement: Dh5,000
Do I need to transfer salary? No
Maximum finance loan: Dh2,000,000
Arrangement fee: 2.5 per cent of the loan amount
Interest rates: From 3.99 per cent
Loan deferment option: No

First Abu Dhabi Bank (FAB)

Exclusively for UAE nationals, (even those who have a debt burden higher than 50 per cent of their monthly salary)
Minimum salary requirement: Dh10,000 is required
Do I need to transfer salary? Yes
Interest rates: From 5.12 per cent
Long term repayment plans
Arrangement fee: 1.05 per cent
Loan deferment option: Subject to individual application

In all of the above, loan eligibility is a function of repayment capacity in terms of earnings and Debt Burden Ratio. Although banks offer up to Dh2 million in personal loans, all are not eligible for such huge loans.

There are other options offered by banks if you hold your salary with them. Talk to your own bank and see what debt consolidation loans they can offer, especially if your DBR is less than 50 per cent of your monthly salary.

Debt consolidation only helps those who will then adopt a sensible approach to their finances. It is definitely a way of looking at your debt and taking ownership of your finances to get into a better place for your future and your family. If you go back to old habits, it’s not the solution for you.

When should you consider debt restructuring?

If you are in severe debt and financial hardship rather than in just a bit of a vicious circle with your debt, then you might want to consider restructuring your debts with your lenders. You may be ineligible for a loan due to your DBR being more than 50 per cent.

debt burden
Debt restructuring will likely hurt your credit score because you will essentially renegotiate your agreement and default on the original loan. Image Credit: Stock photo

You can agree on an amount that you can pay back instead of the full debt, but often this requires an external party to negotiate on your behalf. It will also likely hurt your credit score because you will essentially renegotiate your agreement and default on the original loan.

Both debt restructuring and debt consolidation have the same goals - to lower the interest and pay off the debt as soon as possible.

Other options to pay off loans

Advance salary

If you have a regular income but are still in a really difficult position and none of the above solutions are suitable for you, you could talk to your employer about advance salary payments, which could be set against your end of service gratuity.

Never ever take a loan from an unregulated company or person

They are illegal and could land you in even more debt than you started. Always go to a well-known bank or financial institution or talk with a properly trained financial advisor. Talking to a specialist will cost you nothing and could save you from a mountain of debt, stress and financial worry.

You could talk to your employer about advance salary payments, which could be set against your end of service gratuity

- Carla De Silvo

Always be on the lookout for better deals

Your finances are your responsibility so you must always be alert and look out for the best deals. Just because you’ve restructured a loan or consolidated your credit card and loan debts doesn’t mean you can then go out and get another credit card, all because it offers air miles or a 0 per cent balance transfer. This can be particularly tempting if you are prone to overspending and sucked into the high life.

Other types of debt restructuring are similar to debt refinancing. Always keep an eye on better loan rates and offers.

Mortgage07
Remortgaging your home loan to a lower rate rather than a fixed long term-rate could be something to consider. Image Credit: Stock photo

Remortgaging your home

Remortgaging your home loan to a lower rate rather than a fixed long term-rate could be something to consider, and could reduce your monthly repayments considerably, meaning you could even overpay each month.

The larger your mortgage or loan is, the less significant the drop in rate needs to be to benefit from refinancing.

Stay focused, stay disciplined

Be persistent and you will get there.

Settling debt won’t happen overnight and takes discipline and commitment. It is easy to fall into the cycle of borrowing and to be tempted by loans and offers when you are stressed and in need of additional cash.

Stay ahead of the game and make sure you seek professional advice if you are unsure where to start, however small or large your debt currently is. If you act now, it could save you from a lot of pain in the future.

- The writer is a financial coach and Executive Associate Partner of Finsbury Associates in Dubai