It’s summer time and, with family holidays to book, kids to entertain through their break, massive summer sales and Ramadan deals, you may be tempted to get a personal loan.
If this is something you’re considering, there are a few things you need to factor in…
Credit-worthiness – not just of you, but your company
Only five UAE banks provide personal loans to employees of companies that are not listed. This is a very local issue, because of the lack of a national credit bureau. Without one, banks cannot quickly assess other loans, whether you have ever defaulted and therefore how big a risk you are. [More: Does your company influence your credit-worthiness?]
Flat or reducing rate?
A rate on a personal loan can be calculated as a reducing rate or as a flat rate. A reducing rate is calculated on the outstanding balance, and a flat rate on the principal amount for the whole period. So a loan at a reducing rate of eight percent is exactly the same as a loan at a flat rate of 4.41 percent (the general rule is to divide reducing by 1.813 to get the equivalent flat rate). Souqalmal.com’s comparison tables show which rate each loan is based on. [More: A loan of 18% is more expensive than a loan of 24%?]
One of the questions I get asked most often by our site users is about the difference in reducing and flat, so make sure you understand the difference and even question the bank on it. Many of us are expats in the UAE and the banking industry differs quite a bit from our home country. It’s important not to assume that it works the same way and ask any questions, however simple it may sound.
Are there any other costs?
Find loans to match your salary and how much you want to borrow – but then check the FULL cost of the loan, not just the rate but the arrangement fee, the early settlement fee and any mandatory insurance.
- Arrangement fees: Charged at the beginning and added to your principal loan. Some arrangement fees are interest-free but others charge from AED 600 to two percent of the total value
- Early settlement fee: If you think you may want to pay off your loan early, check how much it could cost, and whether it matters if you settle in cash or refinance, either with the same or another bank. [More: Real cost of paying off your personal loan early]
- Insurance: Some banks insist on insurance to cover you for critical illness or unemployment; others may offer it as an option. Check if this is already built into your repayment.
Don’t sign on the dotted line until you’ve counted all the costs, not just the marketed benefits; a personal loan can help a lot when you have big outlays but you need to be sure you understand what you’re getting into. That holiday could end up costing you an awful lot more than you thought otherwise.