Complete guide to getting a Personal Loan in the UAE

Personal loans are unsecured loans that can be availed from banks and Non-Banking Financial Companies (NBFCs) without any security. These loans can be used to fund an asset or an investment but there is a range of factors that must be taken into consideration before applying for one.

Here, we'll walk you through everything that must be considered before opting for a personal loan in the UAE along with ways to compare them online.

A personal loan can be taken for various purposes like buying a car or a house, debt repayment, for education, relocation etc. Globally, it is also one of the fastest growing types of unsecured loans. Although the amount isn't as high as what you'd get for a secured loan. In the UAE, the maximum limit for personal loan goes up to 20 times of monthly salary or Dh1 million, whichever is lower. The maximum tenure for this kind of loan is 4 years (48 months).                             

Why you should/should not take a personal loan in the UAE

Before taking a plunge into the world of personal loans, we need to carefully asses the pros and cons of such a financial facility.   

1) Interest/profit rates.

Because of lower Sharia-compliant profit rates opting for a personal loan from a UAE bank is beneficial for a financial need in your home country.  

Because of lower, Sharia-compliant rates, taking a personal loan from your UAE bank for a financial need in your home country can be beneficial. Since Sharia laws govern the financial operations here, the UAE in general has lower per annum profit rates. However, profit or interest rates vary depending upon the cost of funds. You can get an unsecured loan for a fixed interest rate of 5 percent or lower in the UAE. What an expat should keep in mind is that his/her future income is enough to repay the loan since debt burden increases if the domestic currency is weaker.

Also, do not forget to research and explore the concept of nominal rates, interest rates and inflation.                

2) Ease of repayment

While applying for a personal loan, you can opt to pay off through auto debit facilities since this loan is directly linked to your incoming salary.

3) Consolidation of debt

Many expats resort to personal loans to pay off debts accumulated from credit cards and other personal needs. Banks too propose personal loans to pay off a pending debt through this new loan that offers the advantages of an affordable monthly installment. 

4) Early repayment

In the UAE, early repayment of loans is made easier with nominal early repayment fee. Most of the countries charge a hefty fee for early repayment of loans that render it not worth the effort. However, the UAE allows full early repayments by charging a maximum of 1 percent of the principal amount. Let’s say you principal amount is Dh80,000 and you want to pay off Dh40,000 with the money you have, in this case, the UAE banks can’t charge you more than Dh400.                              

5) Do the math

There are a few things to consider before you opt for a personal loan that can make this decision economically and mathematically viable.

• Calculate your currently active debts (if any) and their installments.
• Your existing salary account bank vs benefits offered by other banks.  
• Calculate each card’s penalty and outstanding amount.
• Installments you can afford after paying for essential expenses and other active debts.
• Loan tenure for each card and loan.
• Service fees.
• Interest rates on fixed and reducing loan amount

When to take a personal loan?

1. A personal loan could be a great idea if:

• You need to pay credit card bills that ave been pilling up along with hefty penalty fees levied on them.
• You need some extra cash for a marriage, child birth, to pay for college education or relocation. 
• You need to pay for an already financed asset purchase in your home country.

2. A personal loan is a not-so-great idea if:

For lifestyle expenses such as cosmetic procedures, shopping, non-essential car makeovers.

• If your personal loan will not help consolidate previous debts, especially if you are struggling to pay off debts.
• If you can get an interest-free loan from your workplace.
• If the loan is for risky investments.

What do you really need to get your personal loan approved in the UAE.

1. A Good Credit Score: 

In the UAE, the banks ask for salary transfer letters from the employers and check credit Score along with at least six month’s expenditure history.

The al etihad credit bureau (AECB) centralizes financial information across emirates, including credit scores of individuals. AECB collects an individual’s information from various financial sources to generate a credit report based on existing loans, installments paid, delayed payments, bounced cheques and number of cards. While a good score is above 700, an average score lies somewhere between 300 to 900. A low score is likely to result in non-approval of the loan applied for.

You can get an AECB report online against a Dh105 fee. If you’re planning to get the credit score and credit report separately you’ll have to pay Dh32 and Dh84 respectively. 

2. Debt Burden Ratio:

This is used to analyse debt burden in comparison to your income. If the ratio lands above 50, it means that more than half of your income is spent for paying off existing debts. In such cases, banks become unwilling to provide new loans. In such cases it is advisable for the applicant to not opt for any more loans and instead focus on clearing the existing liabilities by either cutting down expenses or to generating alternating income. The Central Bank of UAE has directed financial institutions to be cautious when setting monthly installments and that they should not increase beyond 50 to 60 percent of monthly salary.                   

3. 20 times salary

You can get a personal loan of up to 20 times the salary with an upper limit of Dh1 million. However, there are a few banks that offer up to Dh2 million for expatriate applicants. 

4. Security cheques

At the time of approval, banks collect a post dated cheque against the loan amount. There’s a minimum requirement to avail the loans.

5. Salary transfer letter and end-of-service benefits

The bank may ask your employer to produce a letter stating that end-of-service benefits if your salary is credited in the same bank that’s being used to avail loans.

How to choose the best personal loan plans for self?

1. A new bank vs your own bank

Applying for a loan from the same bank in which your salary gets credited has definite advantages like automated payments, smoother processing, etc. Additionally, if your employers are listed with the bank it might help ease a few restrictions. From a financial point of view, listed companies are credible and stable, capable of aiding loan processing for their employees. Compare both the banks to understand who are the best personal loan providers in the UAE.

2. Interest-based payments

When you opt for a fixed rate interest option, the installments remain consistent until the end of the term. When the interest rate is reducing, the initial installments are higher but they go down as the interest is charged on the outstanding amount.

3. Fixed or reducing interest rate for personal loans?

If your loan term is for 1 to 2 year, a fixed rate scheme may be better, more affordable option. However, if the loan term is longer this isn’t an economically feasible choice since interest paid will be very high at the end of the term.   

4. Insurance coverage

Some loans cover for death as well as unemployment. In such cases, additional charge is applicable as a percentage of the loan amount. Some loans come with life insurance too to cover for untimely death of the lender.

5. Non-Refundable Loan arrangement fee

Banks charge non-refundable processing fee at the time of loan application. At times the fee is interest free and charged for separately. It can also be clubbed with the loan amount and accrues interest. These charges vary from 1 percent to 2.5 percent and capped at Dh2,500.

6. Additional charges

It’s important to read all the terms and conditions carefully so you’re aware of every fee applicable to your loan. Late payment of installments often attracts a penalty so you must be abreast with every term written on your loan processing pages.

7. In case of a job loss

As expatriates, any untoward even that leads to a job loss can completely shift the economic equation. That is why it is important to have a stable income to be able to pay off the debt. In such cases, banks provide a ‘credit shield’ to offer some respite when the person fails to pay the outstanding amount. Such options are available only if you fail to pay the installments for three consecutive months or six non-consecutive months. 

8. Deferring installments

Some banks offer postponement of monthly installments while others charge a fee on such deferrals. If you lose your job, you can defer payments for a few months while trying to find yourself a new employment. However, you must inquire in detail about such deferments before signing any documents.  

9. Credit shield

Credit shield allows you some breathing space in case of involuntary loss of employment. However, this needs to be discussed in details with a legal advisor as they many situations aren’t covered even after payment of necessary fee. This shield is to keep you afloat during hard times when you’re made redundant due to unforeseen circumstances. However, it is important to know the exact conditions to make sure this shield yields when you need it.

10. During loan term

During a loan tern you can try and stash away small saving to cover up for you in case of an unexpected unemployment. For example, if your monthly installment is Dh1,000 try to save Dh300 each month. This way, you’ll have extra Dh1,200 every fourth month. In case of unemployment, by this calculation, you will have at least four months’ advance installments saved up. In the UAE, a person’s employment status and loans are not related unless there have been instances of missed installments. That is why it is important to pay the installments irrespective of your employment status. When the installment are missed for three consecutive months, the bank is liable to take action to collect funds.  

It would be better to activate deferment if you can foresee yourself unable to pay the installment instead of waiting to save up enough to pay the due amount. This is counted as bank-given facility and not non-payment. That is why it is judicious to pay your installments timely even before you’re far from a junction of a job loss. You can also compare personal loan online to find an option that’s closely aligned to your expectations.

What to do once the loan is paid off?

It isn’t enough to pay your loan off in the UAE. There’s a lot to be done to end your loan relationship with the bank, in short you have to go through every step to unsecure the loan that were followed to initially get it. One of then is obtaining back the cheque that was given to bank as a security backup. 

You also need to get a bank clearance letter as soon as the debt is cleared. This is to get a clear debt report and might cost you around Dh60. to stay ahead of discrepancies, always get everything in writing and keep on checking your bank accounts. It is always good to get a credit report once your loan is paid off to make sure that your credit history is correctly updated.