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.
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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.
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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.
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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.
Quick thought on your below statement:
“If you miss three months’ worth of loan installments, you will be considered as having defaulted.”
As per most of the T&Cs and loan/finance agreements of different Banks even a delay of one day can be deemed as default. Three or two months wait for filing of a case or initiation of legal notices is just a market practice – contractually a customer is a defaulter if the payment is delayed by one day. and Bank(s) reserve the right to file a case against such customers
Hello Ahmad, thanks for sharing your thoughts. The three month non-payment generally qualifies as non-performing loan, so yes – rightly put! And confirmed by the banks too. But we’ve been told that generally the banks take action against customers after several attempts to get the customer to get back on track with the loan instalments, usually when it is classified as an NPL, but at what point they may cash in the security cheque – this could vary from one bank to the other. In any case, the idea is customers should be aware that missing payments could have significant consequences.
“In the past, it was not uncommon for banks to demand blank security cheques from their customers before they granted them financing facilities.”
How far in the past do you regard this as common practice? As far as I am aware it still happens. I had to provide blank cheques for both personal loan and autoloan to Emirates NBD late last year. I queried the practice, but as per standard the agent who came out with the paperwork knew next to nothing about anything. This seems to be especially if the query relates to something slightly outside their standard process.
Hello TT, we never said that it doesn’t happen. We are just saying that it has become clear from the Central Bank that customers should not be asked for a blank cheque. Thanks for your contribution.
Guys,
as long as no securities or guarantees are provided to each customer, a lot of above are not useful and needs quickly to be identified properly.
How come I provide a security cheque to the bank while anyone can suddenly lose his job without prior notification.
I need a clear and unambiguous answer from somebody specialist in banking field.
Hi Raied, I see where you’re coming from here. But in this article we are tackling the security cheques issue specifically. Employment situations are a different story altogether with several dimensions. We had written an article about what happens to your account when you change jobs and it may help shed a bit of light on the topic. Hope this helps