News Column

Look for options before signing hot deals

July 3, 2014



Souqalmal.com lists some 79 personal loans from 25 banks for you to compare here in the UAE.











Summer is a time for holiday travel, Ramadan and sales shopping deals… and just a bit more cash to help you indulge feels very tempting right now. With all the personal loans on offer, it seems like an easy way to get your dream holiday, or that special home renovation.







Souqalmal.com lists some 79 personal loans from 25 banks for you to compare here in the UAE. The minimum salary requirements range from Dh3,000 up to Dh30,000 and products vary greatly in price and features — with some niche loans for education, travel and even for paying your rent.







But watch out — the majority of banks will only provide personal loans to employees of companies that have been approved; and there are just five banks which will provide personal loans to employees of companies that are not listed.







This phenomenon is very localised and has come about because a national credit bureau has not yet been put in place for banks to centrally check our debt burden and creditworthiness, meaning that in the past borrowers were able to run up debts from multiple lenders that many proved unable to repay.







What does it mean to be working for a company that is not listed or approved? In other parts of the world, the credit bureau will be able to tell the bank about any other loans the customer has, whether the customer has defaulted on any of his/her bills etc. All of this information is then used by the banks to evaluate the risk of lending you, that potential customer, their money.







In the UAE, where there is currently no federal credit bureau (although one is due to launch any time now, after collecting data for the last two years), banks have to resort to other methods to assess the risk of lending. One of the criteria they use is the sustainability of the company you work for — factors such as number of employees and revenues.







Most large corporations will be listed with all the banks, as they are stable and have a credit history, but that may not be the case with smaller firms. The only way to find out whether your employer is "approved/ listed" with any UAE bank is to call and ask. In some cases, your HR (human resources) manager, the person who would also have to put together salary certificate letters if you were to apply for that personal loan, should be able to help you as well.







To figure out what loan would be suitable for you, find ones that match your salary level and the amount you want to borrow. Once you know what loans you are eligible for, it is important to look at the full cost of the personal loan and not just the rate. The total cost of taking out a loan would include the rate on the loan, the arrangement fee, the early settlement fee and any insurance the bank may add on the repayments to protect you from a job loss or other mishap.







The extra costs to watch out for on your personal loan:







Arrangement fees







This is a fee the bank charges at the beginning of the loan and is lumped in with your principal loan amount. Some of the arrangement fees on offer may be interest-free but a charge of anything from Dh600 to two per cent of the loan value is possible, depending on the loan you're looking at.







Early settlement fee







If you're planning to take out a five-year personal loan to give you maximum breathing space for repayments, but hope you'll be paying if off before then, the early settlement fee is an important factor in your decision. Check the small print, as some of the deals on early settlement fees only apply if you settle in cash and not if you subsequently refinance. Some banks will charge you if you move your loan to another bank but not if you are paying it off in cash. When you actually calculate the early settlement fee, you may find you're better off continuing until the end of the loan's tenure rather than settling.







Insurance







Some banks, as part of the repayment, have an insurance policy to cover you for unemployment and other unforeseen circumstances during your tenure of your loan. Please do check with your bank if this is already built into your monthly repayment and, if you decide you'd like the protection, make sure you add it to the total cost of the loan when doing your sums.







Flat and reducing rates







The rate is still considered by many to be one of the most important factors in a personal loan, but this is also where there is most confusion. A rate on a personal loan can be calculated in two ways — as a reducing rate or as a flat rate. A reducing rate is calculated on the outstanding balance of your loan, and a flat rate is calculated on the principal amount for the duration of your loan. So a loan at a reducing rate of eight percent is exactly the same as a loan at a flat rate of 4.41 per cent (the general rule is to divide reducing by 1.813 to get the equivalent flat rate). So be careful when you compare rates, as one bank may be advertising a reducing rate loan and the other a flat rate loan. You can find both the reducing rates and the flat rates on Souqalmal.com's comparison tables.







After doing a full cost analysis on taking out a personal loan instead of just a back-of-the-envelope calculation, you may find your holiday or home improvement costs a lot more than you originally thought. Make sure you're fully in the know about all the costs and details before signing on the dotted line.







The writer is the founder and CEO of Souqalmal.com. Views expressed by her are her own and do not reflect the newspaper's policy.


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Source: Khaleej Times (United Arab Emirates)


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