The UAE Central Bank has recently announced important changes to the rules governing retail loans in the country, in a move that could bring much-needed respite to borrowers.

The move comes at a time when the US Federal Reserve has been pushing up interest rates, forcing UAE banks to mirror the move (since Dirham is pegged to the US dollar) and making borrowing more expensive in the Emirates.

What are the changes and how do they affect me?

In one of the most sweeping changes, the Central Bank has now made it mandatory for banks and financial service firms to offer reduced interest rates without increasing the repayment terms when customers decide to transfer their loans from one lender to another. Most customers prefer transferring their home or auto loans from one bank to another if the latter is offering cheaper interest rates. However, now borrowers do not have to worry about extended repayment periods even as they reap the benefits of lower interest rates.

Under the new rules, borrowers can now transfer their personal loan from any bank in the country in return for an early repayment commission not exceeding 1 percent of the remaining amount of the loan, or Dh10,000, whichever is lesser.

Plus, the Central Bank has said that lenders and other finance companies are also expected to slash the interest rate for loans which were granted prior to the introduction of the new rules. Again, this is without increasing the repayment period or giving additional loans or funds to the borrower.

Banks in the UAE are expected to accept the loan transfer requests if certain conditions are met which include commitment to the new rules pertaining to the loan amount, repayment period as well as monthly installments.

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How will the new rules help?

Interest rates in the UAE have been on the rise, with the central bank recently raising its repo rate by another 25 basis points. The new rates are set to make borrowing dearer for customers. Since the UAE follows the US Fed rates, the upward trend in benchmark rates has been worrying borrowers for the past few years. Since 2015, the US Fed has announced as many as eight interest rate hikes, which has pushed up significantly the costs of personal loans in the UAE.

The banking watchdog’s decision to enforce reduced interest rates whilst keeping the repayment terms intact will give borrowers a chance to make a switch during the repayment term if a rival bank is offering lower rates compared to the current lender. This is particularly beneficial if you have a longer tenure left to repay your loan as you can save more in the long run.

Plus, the new rules could also raise competitiveness in the market as banks are expected to reduce their rates to convince customers of rival lenders to transfer their business to them.

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