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Personal Loans in the UAE.
As the cost of living in the United Arab Emirates is increasing many of us are starting to feel the affect. Salaries remain stagnant and many are finding they must dip into their saving funds to get by.
In order to make large purchases such as holidays and home appliances or even just to consolidate existing debt more residents are applying for Personal Loans. What is even more alarming is that many UAE residents admit they are unable to save due to the high and increasing cost of living. The regions banks have also announced objectives to grow their retail divisions, leading to further loan incentives and fuelling the increase of personal loan applications.
One of the most applied for financial products in the UAE is now the Personal Loan. We outline below what is a Personal Loan, what is the best personal loan in the UAE and what are benefits and disadvantages of taking one. We also uncover the most commonly hidden clauses when applying for a personal loan.
What is a Personal Loan?
A personal loan is a financial agreement between a lender and borrower. The lender agrees to give the borrower a set amount of money to be repaid over an agreed duration.
Involved with the borrowing of money is interest. Interest will be paid monthly at an agreed rate, other charges normally connected with a personal loan include arrangement or settlement fees.
Personal Loan agreements also include terms and conditions, these set out what both parties can expect and what must be adhered to within the agreement. Terms and conditions will vary dependent on the lender. The borrower must keep to the repayment terms to avoid penalty or additional fees.
The first thing to remember with a personal loan is do not borrow more than you can comfortably afford to repay. Most people at some point in their lives need to borrow money and understanding the benefits and disadvantages will ensure you are getting the best deal.
How Do You Apply For A Personal Loan?
There are various different avenues when applying for a personal loan. One of the easiest is now online, once the online application is submitted a bank employee will contact you and advised on further actions.
For any Personal Loan in the UAE you will need to provide personal documents and information such as your passport, Emirates ID, proof of employment and current financial debts. You will also need to agree the amount of money you wish to borrow, duration and the rate of interest is set which you must repay.
Most UAE Personal loans are Unsecured
Unlike the UK, US or most of Europe here in the UAE most Personal Loans are often referred to as an unsecured personal loan. This means the money you borrow is not secured against any asset.
Interest Rates – Reducing and Flat Rates
You can typically borrow as little as AED 10,000 up to a maximum of AED 3,000,000 with a personal loan. The interest rate is usually calculated in two ways, a Flat Rate or a Reducing Rate.
A reducing rate is based of the remaining amount left on your loan each month and a flat rate is provided upfront on the principle amount.
To work out the difference between a flat rate and a reducing rate you would divide the reducing rate by 1.813 to get the flat rate. Banks may often advertise with the flat rates to draw you in so always check the rate you have before signing up. It is often easier to show a flat rate as it is fixed for the duration and whereas a reducing rate has many more factors, changes monthly and is harder to provide accuracy on a general basis.
As an example a loan that has a reducing rate of 10% would have an equivalent flat rate of 5.5%.
Terms Of the Loan
How much you would like to borrow will affect the terms of the loan. Every bank has a maximum loan amount and it will vary based on your individual circumstances. You will also need to show a salary certificate proving your minimum monthly income, it is advised that you look at loans with higher loan amounts and lower salary requirements to ensure you are getting the best deal.
As an example, it would be difficult to pay off a AED 50,000 personal loan in just 12 months as the repayments would high. However, if you borrow a smaller amount of only AED 15,000, across 12 months the repayments are now more manageable.
It is also worth looking at longer loan terms to ease the financial repayments. The cost associated with a longer loan term means you will repay less each month, however overall you will pay more interest so the total cost is higher.
As an example if you loan AED 50,000 over four years at 5.93%. The monthly repayments would be AED 1,635, and your total interest would be AED 8,860. If you extended the tenure over four years, the monthly payments would reduce to AED 1,228, but you would pay AED 11,824 in total interest.
What is a Personal Loan arrangement fee?
The arrangement fee is common with every bank in the UAE, some banks will waiver their arrangement fee during campaigns but generally there is no avoiding them.
The bank will charge you the arrangement fee to cover their set-up costs, such as admin and creation of documents. The arrangement fee is calculated off your principle loan value and is often about 1%.
What is an Early Settlement Fee?
Most banks will allow you to pay off your personal loan before the end of the agreed loan tenure. As early repayment means the lender is no longer making the anicipated interest they charge an early settlement fee.
Settling your loan early is a good idea if you are refinancing but be careful to read your terms and conditions the fee charged could wipe out any potential interest savings.
Personal Loan Consolidating your Debt
If you hold debts with other lenders at higher interest rates a Personal Loan can be good idea as it will lower your rate of interest. If you had a debt of AED 35,000 at a rate of 8% you could take out a loan for that amount at 4% allowing you to pay less interest for the same amount.
What is Salary Transfer?
A Salary transfer is very common when applying for a Personal Loan. It means that the applicant will have their regular monthly income credited to the bank with whom they are applying for the loan. This reduces the risk to the banks, customers who transfer their salary will often be given preferred rates. If you do not want to transfer your salary to a new bank there are a number of providers who will approve loans without salary transfer, these are know as non salary transfer loans.
In any case whether you are transferring your salary or not you will need to produce a salary transfer certificate.
Is my Company Listed with the Bank?
Other factors that have an impact on your Personal Loan application will be who is your employer. Banks usually like to have a relationship with your employer, this is known as an employer being listed. If your employer is not listed with the selected bank it can be harder to gain loan approval, this is due to no history or banking relationship with which the bank can reference. Your employer will be able to tell you which bank they are listed with.
The UAE are doing more to assess your risk when applying for a Personal Loan by beginning to use the AECB (Al Etihad Credit Bureau). The Credit Bureau will, where possible look at your previous credit history, loans, debts and credits cards associated with your name to help the bank make a decision on your application.
If you are judged likely to default on the loan because of a poor credit history you may have to reapply elsewhere or change the terms of the personal loan to provide the bank with greater security.
Most lenders prefer if you have protection cover, in the result that you cant keep up with the loan repayments your debt can still be paid. Most banks will provide this for an additional fee or include it complimentary subject to terms and conditions. It is important to read the small print of any policy and to understand the various exclusions as you may not be covered.
Is it possible to extend a personal loan?
This is also commonly referred to as refinancing, a new lender will buyout the loan from your existing bank. There is also the option if the relationship is good with the bank to request further finance. This is normally done if you have a change in salary or would like to add a secondary income.
Need to know more?
You should always do your own research before taking out any financial product. To be sure that a Personal Loan is right for you why not check out our Personal Loan Guide or visit our moneyguide.ae articles section to find everything and more you want to know on Personal Loans in the UAE.