Dealing with debt and loans in the UAE: First-hand accounts

Often, say those stuck in the rut, you take from one to give to the other – if your commitments are not met, you are guaranteed a stint in the local prison and a blemished record.

While the thought is frightening, sometimes medical, family or official duties can pry your hands loose. We ask three people who were – or are – neck deep in debt. What brought them to this point in their lives? What does their payday look like?

Please note that names have been changed to protect privacy.

My mother had to sell her jewellery so I could survive

- Rahim, Pakistan

“I had given up completely. I was too scared to walk out of my house,” says 31-year-old Rahim from Pakistan in a wobbly voice as he talks about his debt. A series of misfortunes left him unable to repay his loans; it also chained him to the vicious circle of borrowing.

Here’s a timeline of his troubles:

2009 Rahim, who is earning Dh29,000, has taken two mortgages on under-construction properties. He has put a down payment of 25 per cent and exhausted much of his savings..

2010 Last quarter, Rahim loses his job.

2011 For the first six-seven months he has no income: begins to use credit cards to pay mortgage instalments. At some point he’s also accrued a Dh300,000 personal loan.

2011 Finally, Rahim gets a job with a pay cut. He is now earning Dh18,000.

The result: “The personal loan was around Dh300,000. My credit cards in total [came to] around Dh300,000. It [my debt] was spilled across seven credit cards,” he explains. When Rahim tried to dispose of his properties, still under construction, he realised that to just close the mortgage he would have to put up another Dh150,000.

Eventually, he says, “I lost my down payment money, I had to put in more money…and what ended up happening was I was left with, I guess, Dh800-850,000 in unsecured debt.”

"So how was he managing his daily expenses? “It was mostly revolving. I was borrowing from some friends, my dad was working at that time so I borrowed some money from him. It was negative at the end of the day. It was a very bad state. At one point in time I used to have four cars at home, when I was doing really well.

"I started selling those cars one by one. I had an apartment in Pakistan, I sold that off; I borrowed some from my sister, I borrowed some from my dad; my mom sold some of her jewellery. That’s how I managed.”

But the worst was yet to come. He says that when he started getting the collection calls, he was astounded. “They [collection agents] don’t talk to you properly. And the way these guys are trained they will just threaten you with anything and everything. For instance: ‘We’ll come into your office’; ‘we’ll speak to your employer’; ‘we’ll call your home country’; ‘you’ll get a travel ban’.”

He says he asked about payment plans that could help him divvy up the debt, but all he got in return were ultimatums. “I cannot pay off a 30,000 or 40,000 loan in four months. That’s beyond my capability to do. And the thing is in spite of explaining it to them [they hounded me] – and believe it or not this is the case across all banks. I’m talking purely out of experience. The only thing they are interested in is their money.”

Unfortunately, sometimes, these are not idle threats. “I’ve had [someone] turn up at my HR department with a letter, it almost got me fired. And it was not like I was not making payments, I was falling short by two payments, but he still decided to do that,” says Rahim, bitterly.

“It had come to a point where it had affected my health so terribly that I would have almost landed up in hospital,” he says.

Having given up, Rahim started to default on his loans. He stopped answering his phone or leaving his house. He lived in fear. A friend who had been in a similar pit helped him get in touch with a debt consolidation company. “He [the debt consolidation agent] helped me reschedule around five of my credit cards in the first attempt itself. So my salary was Dh18,000. I was paying Dh24,000 a month, that Dh24,000 payment came down to less than 11,000 in a month. And not just that, there were two cases that he [consultant] helped me close without any additional payments,” he exclaims.

You borrow to pay off other lenders

- Mohammad from Jordan

Mohammad, from Jordan, has called the United Arab Emirates his home since 2004. An engineer, his choice of profession has offered him a lucrative career. Mostly. When he was making his way to the emirates, in 2000, he paid little heed to the firm he was signing up to.

“You know when you first come here you want to work with any company, you don’t know the name, their procedures, how they are doing. But I started with a very bad company; they are not paying salaries so I have to stay two-three months without salary. I have to use credit cards and loans [to survive] (sic),” he explains.

The rest was just a downward spiral. Once you start, he says, you can’t just stop. “You don’t have other income. The people from the bank were very sweet, very kind…I got one credit card by phone, I didn’t even submit any paper –like zero. 2008 I needed credit card, the second day it was in the mail,” he says of the ease with which he gained access to funds.

And although a few years later Mohammad had found himself a more dependable employer, he was still faced with an uphill task. He recalls: “My worst case was about two years ago; I [had] to pay like Dh45,000 and my salary had reached Dh40,000, so I had to borrow to cover it.”

“You remove [a] hat from this head put it on another head,” he says; you borrow from one to pay the other.

A bout of cancer in 2014 also took a toll. Medical unsecured debts along with his credit card trouble led him to a loan of almost Dh1 million.

Come 2016, Mohammad felt lost. In the depths of despair, he met debt consolidators who helped him balance more favourable terms of interest. “Previously I had you know like credit card [with the limit] Dh200,000. I have to pay Dh10,000. They deduct Dh8,000 as fees. I didn’t know about it. Now I am paying but they are taking it out of the outstanding [principal] so it’s reducing month by month,” he explains.

So far, the gent has managed to close about five credit cards. His time in the loan house is almost up.

I can’t live with my family, because of my debt

-Rafiq, from Pakistan

“I’m 45 years old,” says Rafiq, his voice strained but determined.

“I’m working [at the] airport as a general helper. I was living with family [in the country]. [Then a] year [ago] my family left. [It was] 2007 [when] I came here, from Pakistan.”

The living expenses began to tug at Rafiq’s purse strings almost immediately. He took one loan for a car and his children – he has five; the last was born in the UAE - started getting an education.

“School fees is very costly, residence is very costly so we were living in Sharjah and then…we were in [financial] problems,” he says.

Owing to the strain, his family left. With a voice cracking with emotion he says, “I can’t stay here without my family – like you can say fish can’t live without water.”

Rafiq is trying to pay off his debt. Currently, he has Dh28,000 left in credit card payments and a loan of Dh35,000. He says it’ll take about two years for him to pay off what he owes.

Paydays are particularly tough. While his salary is Dh9,000, when Gulf News speaks to him on the first of the month he has only Dh300 left in his account. “I sent money, like Dh3,500 to my family for school fee, [living, etc.] And here I am paying around Dh3,000 for banks and loan amounts. And Dh1,000 for fuel,” he explains. Then comes rent and food for himself.

How does he manage? He’s running through a borrowing maze. He explains: “Salary is total - including fuel, accommodation - Dh9,000. Right now I don’t have any money in my hand.

“What they did, RAK Bank, it was Dh17,000 credit card. What they did was increase Dh4,000 in the card. So I’m using that amount and now I have Dh1,400 in my card, which I am using.”

He still has hope though, “Hopefully in the next few months I will save Dh1,500, then I will deposit to my bank and maybe in the future I’ll increase my salary and I’ll call my family here.”

What sort of loan is right for you?

There are five types of borrowings that you can consider based on your requirements:

Personal

Personal loans are also known as unsecured loans because they don’t require a collateral for approval. “The personal loan market in the UAE is primarily split into salary-transfer and non-salary transfer loans, explains Ambareen Musa, Founder & CEO of souqalmal.com.

“Further, loans can also be divided into conventional and Shariah-compliant options, for expats or UAE Nationals, and some banks may also offer personal loans for employees of non-listed companies (where the employer isn't on the bank's approved list),” she says.

Salary transfer loan:

It offers a lower interest/profit rate,

It requires the borrower to transfer his salary to the lender.

Non salary transfer

No salary transfer requirement,

Rates can be twice as much or more, says Musa, when compared to the salary-transfer variant.

Conventional

A conventional loan is a mortgage that is not guaranteed or insured by any government agency. It has a fixed rate and time for repayment.

Shariah-compliant

Islamic Loans  are offered by various Islamic and Conventional banks in accross the emirates. These banks and their Islamic finance products are governed by independent Fatwa and Shari'a Supervisory Boards.

Documents required to apply:

UAE national ID card or a valid passport

In case the applicant is an expat then a valid residency visa for the UAE is also needed.

If the bank requires a salary transfer then a letter of salary transfer will also be needed.

Along with the documents mentioned above the bank may ask for post-dated cheques for EMI (Equal Monthly Instalment) for security reasons.

Business

Looking to start up your own firm? Or are you ready to expand but find yourself straining at your budget? This is where a business loan can come in handy.

Term loans: Cash given now, to be paid back over a predetermined period. Online lenders are your best bet in this case for their processing time is swifter as is the amount on offer. The bad part? You may need a collateral which can be sold to pay off your debt if you can’t return the amount in time. The rate of interest is also something to be wary of.

Small businesses loans: Repayment schedules vary depending on the time you’ve been in business, its turnover rate, whether you want to use a flat or reducing rate and what you plan to use it for.

Business lines of credit: A deal with a financial institution can lead to the creation of a tab - or of a credit limit. You can only withdraw funds up to this level and you only pay interest on what you’ve withdrawal. This is typically unsecured, but can rack up fees such as maintenance and withdrawal.

Equipment loans: These can be used to furnish your company with the equipment it requires, The term is generated through the calculation of the product’s shelf life and it in turn becomes collateral. In this type of case, you may need to fund a down payment.

Invoice factoring: Bills, bills, bills. That is to say, cash you are owed, haven’t received, but are in urgent need of. You could see it to an invoice factoring firm that would then be responsible for the collection.

Invoice financing: This is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance.

Merchant cash advances: Cash in your hand that is repaid in kind at pre-decided intervals. Beware though, the borrowing cost on these types of deals is very, very high.

Business credit cards: You use this credit card like a debit card – with the caveat that you pay a minimum amount each month. While the rewards it offers may sound nice, there usually is an extra charge.

Documents needed:

Filled in the application form.

Partnership agreement/Power of Attorney (POA)/ Article of -Association/Memorandum of Association (MOA).

Trade license (copy).

Bank statements.

Passport (copy).

Other valid documents (varies bank to bank).

Mortgages

A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property, explains Investopedia.

Documents needed

Identity proof

Age proof

Proof of income (salaried individuals)

Copy of allotment letter

3-6 months bank statements

Buyer Agreement 
Photocopy of trade/commercial license (Self-employed)

Equity

A home equity loan is a loan for a fixed amount of money; your house works as collateral. You repay the loan with equal monthly payments over a fixed term. If you can't pay back the money, your lender can foreclose on your home.

Auto

This is a self-explanatory type of loan: the kind used to snare a car. For these types of loans in the UAE, you must have a salary of at least Dh3,000.

Documents needed

Application form for the car loan

Valid visa

Driving license

Salary certificate/proof of income

Bank statement(3-6 months depending on the bank)

Partnership certificate in case of partnership in business

How much are you entitled to?

“When assessing your loan eligibility, banks take into account your monthly income as well as your current DBR (Debt Burden Ratio),” says Musa.

The DBR is the percentage of a borrower’s monthly income that goes towards repaying liabilities. “The UAE Central Bank has capped the DBR for borrowers at 50 percent,” he says.

What is a credit score and how can it help you?

“The credit score is a measure of a borrower's credit worthiness. This three-digit score, which ranges from 300 to 900, is calculated based on multiple factors including (but not limited to) the number of loans and credit cards you have, the outstanding balance on each, whether you've missed any repayments in the past and your credit utilisation among many others.”

In the UAE, this score is calculated by Al Etihad Credit Bureau. It’s costs about Dh100 to get a credit report and if you’ve got a rating below 400, your ask is unlikely to gain an approval.

Can you improve your credit score?

Yes. Keep your eye on Al Etihad Credit Bureau, where you can get a credit report every so often.

Besides that, here’s what you can do:

Pay back what you owe financial institutions on time. Or you’ll face fines and a declining credit score.

If you have a credit card that you are not using, get rid of it. Not with a pair of scissors. Head to or call your bank and ensure that the legalities are formalised. Then dig out the cutters. You may not only be racking up usage fees but also registered under your name, it contributes to the DBR you have on file.

What are the extra charges that can creep on you while applying for a loan?

As horrifying as it may sound, discussing and agreeing to a sum and annual rate of interest is not all you’ll be paying the lender. “While some like processing fees for all loan variants and property valuation fee as well as life and home insurance fees for mortgages may be unavoidable, there are others that can be avoided,” warns Musa. Here are some expenses that may creep up on you: Processing fees, insurance fees, installment deferral fees, early settlement fees, payment default charges.


“Other fees like those charged on early settlement and partial repayment may actually be minimal (1% of the repaid amount or Dh10,000 whichever is less) compared to the interest you save on repaying the loan sooner,” she adds.



Things to look at before signing up for a loan

Mohsin Bukhari, of Instant debt management services (IDMS), explains why research is key to a good loan. He says here’s what people should be aware of before hopping aboard the borrowing express:

Terms and conditions: Consumers these days tend to ignore this important piece of paper in black and white these days. As this is the foundation of their finance, [we] very strongly advise [them to] read each and every clause and keep a copy for future reference.

Rate of Interest: Don’t just take out a loan. Even if you are desperate, try to opt for the best possible priced finance. Smart credit card customers [for instance] tend to look for cards with max benefits such as cash back, loyalty programmes, low rates of interest. Such customers tend to clear the full payment each month prior to billing date resulting in huge savings.

Also check about the type of interest rate you are signing up for. A flat rate will mean that no matter how much you make a dent into your loan amount, interest is still calculated based on the original principal; In the case of a reducing balance rate, interest is calculated based on the amount that’s actually remaining.

Be prepared for a rainy day: Always ensure you have enough money for at least six months of installments as savings in the bank. This is in case if you were to lose your job, it will give you a sufficient cushion to look for an alternative employment option.

Benefits/ Rewards: Try to opt for the most fulfilling and rewarding loan. Free benefits such as upfront discounts, loyalty points, air tickets, up front gifts are not a must but good to have.

The complete package: When opting for a loan try to look for a bank which would be a one-stop [shop] for all your banking needs, [with an] excellent branch and ATM network, online banking, loyalty platform, good service reviews, etc.

What happens if I can’t pay back the money?

Musa outlines the steps to take if you find yourself in deep waters:

Struggling borrowers can approach their bank to negotiate a restructured loan agreement wherein the bank may rejig the terms of the loan to extend the tenure, lower the interest or waive late payment penalties.

Outstanding credit card balance may also be converted into a fixed-interest loan to lower the interest due.

Debt consolidation is another facility offered by various banks in the UAE that helps consolidate the borrower's multiple debts into a single loan with a stretched-out tenure and lower interest rate. There may also be facilities like payment breaks or holidays available for those looking for temporary relief.

You could also try third-party debt consolidation or restructuring; both services are offered by many companies in the UAE: again, do your research before entering into an agreement or you may end up worse than when you first began.

If you do decide to abscond, says Bukhari, beware:

1. International Debt collection agencies can chase you in your home country and can further track you down through other relevant international agencies.

2. You could get arrested in case you are travelling via UAE for another country.