I work as an estimator in an advertising company in Dubai and have outstanding loan and credit card debts of almost Dh70,000. My debts are:
Loan: Dh35,100 / Dh2,897 (14 instalments remaining)
Credit card Dh9200 / paying minimum due
Credit card: Dh11,600, paying minimum due plus Dh485 a month (11 instalments remaining)
Credit card: D12,750/ Dh910 (15 instalments remaining)
Total owed: Dh68,650
I borrowed the money a year ago to help support my family in India. I have lived in the UAE for six years and my salary is Dh6,000 and my employer pays for my accommodation. Most of my money goes on card payments and my monthly expenses come to Dh900. I want a debt consolidation loan to help ease the burden but I am struggling to secure a loan because of my high debt burden ratio (DBR). Would any banks offer me a debt consolidation loan? PF, Dubai
Debt Panellist 1: Philip King, head of retail banking at Abu Dhabi Islamic Bank
Your predicament illustrates the main issue of using cards as a tool to raise financing. While taking out a card provides immediate access to funds, the high rates they charge can result in a substantial long-term cost. They are not suitable as a sustainable financing solution and if you continue to just meet the minimum monthly repayment, you will not make any significant progress into cutting the total amount owed. Given that your employer covers your housing accommodation costs, and that after your monthly expenses you still have more than Dh5,000 of disposable income, you are in a relatively strong position to confront your debt.
Your priority should be a consolidation loan so that you can repay all Dh35,000 of card debt. The Central Bank of the UAE’s loan regulations allow banks to provide you with a loan of up to 20 times your monthly salary. They are therefore in a position to lend to you. Ideally, you should seek a low monthly repayment over a longer time period, which will provide flexibility while hopefully avoiding the need to borrow again. When approaching your bank for a consolidation loan, you should have a clear plan detailing your incomings and outgoings that also clearly defines how you propose to repay your borrowings and become debt free.
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The DBR is your total monthly instalments from credit cards and loans, divided by your income. The Central Bank stipulates that the maximum permissible DBR is 50 per cent. As your income is Dh6,000, that means a maximum of Dh3,000 and just your loan repayment is already Dh2,897. This is the cause of problems for your debt consolidation loan.
After expenses and the loan repayment, you have about Dh2,200 to spend every month on credit card balance reduction. You need to get the card balances paid off as fast as possible, as they will grow rapidly if you only make the minimum payments. Prioritise the card with the highest rate.
For consolidation loans, many banks have a minimum salary requirement of Dh8,000, which may exclude you from applying. You can still try to talk to someone at a branch face-to-face anyway to find out more. Avoid debt consolidation loans with reducing interest rates above 15 per cent if possible. Use an online financial aggregator such as Souqalmal.com or mymoneysouq.com to look at what the various banks offer.
1. Ask the bank for a consolidation loan with a longer term so that you pay less per month but ultimately pay less interest on credit card balances. Present them with a clear plan showing all your income and expenses, and your career situation and prospects.
2. Ask your employer for a pay rise, for any extra work you can do or for a salary loan. Use the extra money to pay off your card balances as a priority
3. Look for another job with a better salary and ideally with a company that has a good standing with the banks so that loan interest rates will be lower.
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Unfortunately, the problem with debt consolidation in the UAE is that those who could benefit most from it, are often never able to qualify for it. While some banks only offer this facility to UAE Nationals, those that offer it to expats have stringent eligibility criteria.
Even though a consolidation of all your debts may not be possible, how about speaking to your primary bank about consolidating the loan and credit card you have with them? This would involve wrapping both the loan and outstanding credit card balance into one combined loan that offers you a longer repayment tenure and lower interest rate. It is worth a try, but you should be armed with a Plan B in case this does not work out.
With a total debt of close to Dh70,000 that eats into most of your monthly income of Dh6,000, you should consider looking for alternative ways to ease the strain on your finances. Since you are currently struggling to settle your credit card debts, you are losing a significant sum of money due to the heavy interest rates on these cards. Speak to your credit card providers about locking in a lower interest rate by converting your outstanding credit card balance into a fixed-term loan.
Your credit card debt lies at the root of your debt problem. This is what you should aim to get rid off first. Since your loan is most likely a salary-transfer personal loan, it is not nearly as damaging as your unpaid credit cards. Consider tapping into your existing savings or taking financial help from close relatives to gather enough cash to pay off all or the majority of your credit card debt.
Going forward, you should also trim your budget to keep expenses as low as possible. Assuming you have already done that, you must focus on unlocking a new income stream or finding a way to increase your current income. Asking your employer for a raise, switching to a job that pays more or taking on another part-time job are some options worth considering.
The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to firstname.lastname@example.org