When you take out a loan or any other finance facility, banks in the UAE will request a security cheque from you. But exactly how have these cheques been used in the past and what is the UAE central bank’s perspective? The next time you get a loan, make sure you are aware of the basic facts about security cheques to avoid any misunderstandings.

[Compare personal loans and apply online | Compare credit cards and apply online]

Security cheques safeguard the bank in case you default

On a personal loan of AED100,000 that charges a flat interest rate of 4% annually over 4 years, technically you will owe the bank a total of AED116,000. But your loan is paid back in instalments. So how does the bank cover its costs and interest income in case you were to stop making payments at some point? This is where security cheques come in. If you are no longer making your loan repayments, the bank may resort to cash in the cheque you submitted.

[Related: Why banks reject personal loan applications]

Your bank should not force you to hand in a blank security cheque

In the past, it was not uncommon for banks to demand blank security cheques from their customers before they granted them financing facilities. This meant that banks could put down any figure on the signed cheques. This created ambiguity about how much customers would be liable to pay in case of default. The UAE central bank has helped in eliminating this confusion when it declared that customers should not be forced by their banks to issue blank security cheques. In fact, when asked about this practice, the central bank’s customer complaints department confirmed to us that it is unlawful and that customers have a right to contest it. Instead, the loan and interest amounts should clearly be specified on the cheque from the very start.

[Related: The full cost of a personal loan | Topping-up your loan? Beware the fees]

Things to remember before taking out a loan

If you miss three months’ worth of loan installments, your loan is generally considered non-performing and that is when a bank may cash in your cheque. So before taking out any form of financing, just make sure that you are aware of this fact and that you are able to keep up with your payments. Also bear in mind that several banks now require new replacement security cheques every few years to reflect the updated outstanding loan amounts, so make sure that you are ready to furnish your bank with this.