A teller at a bank in Dubai. How can you ensure not defaulting on loans after losing your job? Let's find out! Picture used for illustrative purposes only. Image Credit: Ahmed Ramzan/Gulf News Archives

Dubai: When faced with a dire situation like losing your job during an uncertain environment such as the current pandemic probably the first panic-filled question that comes to your mind is – how will I pay off my existing loans?

After losing your only source of income, the immediate priority is to look for ways to keep paying your loans. The reason being, not paying your dues poses the threat of you defaulting on your payments, leading to a negative domino-effect on your liabilities and related stress on your financial well-being.

In light of your job loss, lawyers confirm you can contact the bank with a request for rescheduling or restructuring of the loan with a lesser EMI (equated monthly installment) and a longer duration so that you can manage to pay it.

If that is not done, the risk that you face if you fail to make the payment of the EMI for 3 consecutive months or more, is that the bank will deposit the security cheque that you had signed at the time you applied for a loan. If it gets bounced there are chances of having criminal and civil cases against you.

First steps to follow in this situation

It is widely recommended that you hire an experienced lawyer to help you consolidate or settle your debts to UAE banks or finance companies. Let your attorney communicate on your behalf with the creditor and advise you on a best possible solution to resolve the debt collection conflict.

If you have any outstanding debt, your account is likely to be blocked. When changing jobs, your last salary will be marked as a final payment or end-of-service benefit by the employer.

The last thing you want is to be caught out with no access to funds, and/or direct debits with standing bank orders being rejected or declined.

Meet with your bank ahead of time to ensure they explain the process of obtaining a salary certificate and letter from your new firm, in order to avoid accounts being frozen.

Checklist on what to do when approaching banks on this
1. Check with your bank on their policies with regards to change in employment beforehand; this will help you avoid any surprises. Contrary to popular belief, banks do often provide realistic solutions to reduce your financial burden.

2. Check if your bank offers temporary and long-term lower monthly repayment plans as debt advisors confirm that many UAE banks or organisations offer solutions to debt problems. Don’t ignore the fact that you may be in some financial difficulty; contact the provider to see how they can help.

3. Check if your loan terms can be modified if you’re facing difficulties making regular repayments. You will find that many banks are able to accommodate if you have had a good credit history with them.

How to manage finances meanwhile

When you find yourself in a situation with no monthly income, financial planners often suggest that it is a better time than ever to ensure you budget wisely.

Make a spreadsheet of expenses or download one of the handy money apps to your phone. This allows you to keep a round-the-clock eye on your spending and outgoings.

It can be tempting to borrow cash in your hour of need, however, you could spiral into debt much faster and deeper if you take on credit while without a job.

The obvious place to turn for many here would be credit cards, but if you are unable to pay the credit cards off in full each month, they can become a sure-fire way of getting further into debt.

However, debt advisors and financial planners agree that many do turn to their credit cards as a last resort and it has been observed among their clients that this will only exacerbate the situation further as credit card debt comes at a very high interest cost.

If you’re in a money crunch, make sure you know which bills to pay first. It is important to note that the Al Etihad Credit Bureau now produces individual credit reports and is able to mark your account if you incur missed bills and payments, which can affect your ability to take on credit or a loan in the future.

It would be unwise to miss a credit card payment or rental cheque, so prioritise spends like these. Look at repayment strategies such as debt stacking (when you pay back the most expensive loan first) to lose debt quicker, keeping in mind the money you have available.

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What if the bank deposits my post-dated cheque?

In the event of the bank pursuing criminal charges for the dishonour of the cheque, lawyers also confirm that you can present the evidence to the court that may indicate the continued payments of the monthly instalments (EMI) made by you against the loan you have availed from the bank.

Based on the evidence, the court may dismiss the charges against you if it deems that you had honored the payment obligations towards the loan as per schedule. Ensure to document all the EMI payments being made to the bank towards the loan.

What to do with credit cards after a job loss?

Many credit cards offer some type of hardship program. If you run into a temporary setback – like a job loss - it's a good idea to contact the card company before you're 30 days late with a payment. The company may work with you on a hardship payment plan.

If you have no idea how you’ll make your next rent or mortgage payment, then most likely you will need to get a job straight away.

Can insurance protect me in case of a job loss?

Although in most cases, job loss cover isn’t always offered to borrowers and is not an option for every type of loan – even if your loan offers this, to be eligible for claiming your benefits, your loss has to be ‘involuntary’.

You will be asked to show a letter of termination along with additional documents. To avoid surprises, make sure you read all the terms and conditions so that you’re aware of any other exclusions.

Moreover, keep in mind that if it’s the insurance company that pays for your loan in the UAE then the insurance company will enforce the right of the financial institution to collect it from you.

Insurance companies will pay only the minimum amount due for a specified period. As per the law, terminations or resignations are not considered as a factor for coverage.

An important thing to remember is that you need to file your claim and it is not an automatic process, hence once you are repaying an outstanding debt it is your duty to contact the insurance provider and initiate the process.

Could I have prepared beforehand?

You can plan for unforeseen circumstances such as job loss right from the time you apply for a personal loan or credit card. While there is premium attached to such coverage, having an alternative to manage your debt payments will make a huge difference when faced with a job loss.

Based on how personal loan agreements are designed in the UAE, your bank may have the first claim on your end-of-service-benefits from the employer.

It is standard practice for banks in the country to add a clause in personal loan contracts, which gives them complete authority to offset and adjust the borrower’s benefits towards any outstanding loan dues.

So, if you're worried about losing your job in the future, make alternative arrangements to hold on to some cash to help tide you over a sudden spell of unemployment.

What are my other options?

Personal loan and credit card dues can be consolidated into one new loan. The longer tenure of the new loan will help lower your existing monthly instalments significantly thus increasing your disposable income.

This will help you save better despite a reduced salary. Advisors also recommend cancelling your credit card, if possible, to better manage your finances and reviewing your living expenses so you can save more in case of potential job loss.

If you're a dual-income household, this works in your favour. You can plan to redirect the savings from second monthly income towards your outstanding debt. It would be best to repay the small credit card debt you have first, because it is much more expensive than your personal loan in terms of interest.

There have been case studies wherein the bank demands immediate and full repayment of the loan if you are made redundant by your employer. The only resort then, planners say, is you need to find a way to repay the bank the outstanding loan minus your benefits by taking on additional income or a job.

One of the key lessons this pandemic among residents was the need to create more than one source of income whether through investment income or a side hustle – which is a growing trend since purse strings tightened.