The dos and don'ts of personal loans

Interest rates on personal loans have dropped, but be wary of the temptation

When times get tough and you need extra cash for an emergency or unplanned event, personal loans can be your best friend.

The great thing is, the loans sector in the UAE seems to be heating up these days and if you’re in need of an immediate funds injection, there’s a wide array of loan offers to choose from.

Banks are finally back on their feet and they’re now competing to lend to customers at lower interest rates. According to personal finance and comparison site Moneycamel.com, average rates have gone down from 7.8 per cent in 2012 to 6.7 per cent this year. “Banks have reduced interest rates to make loans more attractive to customers,” says Preeti Bhambri, managing director and founder of Moneycamel.com.

“Banks have finally recovered from the 2008 bad debts era and are looking at growing their portfolio in the current scenario,” she says. “Armed with a more robust credit policy governing loans, banks are confident of increasing revenue with a better control on risk.”

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Bhambri says the low-interest regime in the market has dragged down the borrowing costs for banks, enabling them to maintain profitability even with reduced rates. “Currently, banks are also increasing loan eligibility to meet increasing customer needs,” adds Bhambri.

However, before you jump on the borrowing craze, consider the following tips first.

Can you afford it?

With the rates falling and banks less stringent with their lending requirements, it is tempting to sign up to a loan package without thorough consideration.

An important thing that a borrower should consider is whether they have the capacity to pay back their lender. Take an honest look at your current financial situation before you sign on the dotted line. If you have outstanding debts to pay, it is not a good idea to proceed with the loan, otherwise, you will likely struggle with the repayments.

“The key consideration is whether you can afford to make the repayments on the loan. Do you have sufficient income to continue living your normal life and meet the repayments for the debt? If the answer to this is yes, then by all means, go ahead, but often people cannot meet the repayments without compromising other parts of their life,” says James Thomas, director of Acuma Independent Financial Advice.

“Also, question why you are being called to be offered the loan. The company is unlikely to know your full situation. It simply wants to sell a product, so always be wary of this.”

Compare prices

If you have to take out a loan, set aside some time to shop around and compare loan packages. Don’t rely on the advertised or published rates.

The interest charges can vary depending on a lot of factors, including the size of your salary. The 4 per cent advertised by your bank may not be applicable to you because you’re earning below Dh6,000 and the smaller you earn, the higher the interest you will get.

To find out if you’re getting a good deal, examine more closely the total cost of the offer. Calculate the total amount repayable and add up all the upfront costs, such as processing fees. Also, don’t forget to ask the bank what other fees they collect. Think about transaction, late payment, disbursement, foreclosure or early settlement fees. These can all affect the overall cost of your borrowing.

Review the terms

And while you’re comparing prices, make sure you study the full terms and conditions, even before you commit to the loan, so you will know ahead what you’re getting yourself into.

“Always ask for the full terms and conditions. While there shouldn’t be anything hidden, it is always best to check,” advises Thomas.

If you don’t read, the fine print the tricky loan terms could cost you more than you had imagined.

“There are always hidden fees and tricky loan terms. The loan salesman may not know them or even be dishonest. Get the terms in writing from the bank and study them before proceeding,” advises Steve Gregory, managing partner at Holborn Assets.

In his experience, Gregory notes many banking customers have no clue what they have signed up to. “Reality is that more than half of people, in my 30 years experience, have no idea what they are paying in interest and when the loan will be repaid and what happens if they want to repay early.”

Don’t borrow more to get less interest

Interest rates may also depend on the amount of money you’re borrowing. The higher your debt, the lesser the interest could be.

With that in mind, some people opt to increase their loan amount to avail themselves of a good rate. Experts say this is not a wise move and it will be bad for your wallet. Make sure you only borrow what you actually need.

“While the interest rate may be lower, the capital amount will be higher, and so the monthly repayment is still going to be higher. Can you afford this? If not, please think again,” says Thomas.

Negotiate

To lower the cost of borrowing, try to convince your bank to give you a better rate. “Negotiate with your lender – they may be willing to cut the interest rate to secure your business, and so the loan will cost you less,” Thomas.

Watch out for insurance

When you take out a loan, your bank may automatically sign you up to a credit or payment protection insurance. Check the terms of the insurance. In most cases, it is mainly to cover the loan repayments if the borrower dies, loses his job or gets permanently disabled. It does not extend any financial benefits to the borrower or his family in the event of death, redundancy or disability.

If that’s the case, you might consider taking out your own loan to protect yourself against any eventualities, but Thomas says it is not practical to take out an insurance if the loan amount is small and needs to be repaid within a short period.

“While it is good practice to insure any liability, generally the relatively small borrowing amount and short term means that it is not practical to insure the loan.”

However, if you really would like to insure, you may consider getting a term assurance policy or income replacement insurance. “The reasons for taking [out an insurance] are to protect your family should anything happen to you and leave them to repay the debt,” says Thomas.

Gregory says an income replacement insurance will “insure your income for a couple of years, or until retirement, [and] protect your family against your inability to work due to illness or accident.”

 

 

Thanks & Regards

 

Mohammed Rahman Mecheri

 

System Analyst - Network & Infrastructure

KOJ – Head Quarters

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