Debt Consolidation: Debt Collectors, how debt consolidation loans works?

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The population of UAE comprises approximately 80% of expatriates who have migrated to the Emirates in search of better job opportunities and remuneration from their native jurisdiction. Very often expatriates need to opt for personal loans or use credit cards to manage their expenses initially by the time they do not have a fixed job and source of income. Debtors are mostly legally and ethically obliged to pay their dues to repay their lenders. The last option in worst-case scenarios turns out to be debt consolidation aka debt settlement.

There have been numerous cases in the past where expatriates residing in the UAE have fallen into vicious debt traps due to irresponsible use of credit cards which later left them with no choice but debt consolidation. The problem begins when debtors miss their repayments due to financial instabilities arising due to loss of a job, or medical emergencies. In such a scenario the financial institution files a police complaint against the debtor as per the course of action. However, even if there is a police complaint lodged against the debtor there is still a ray of hope i.e. debt consolidation. All you need to do is to reach your bank/ financial institution with a valid reason for skipping the payment so that you can agree on a common note.

Debt consolidation is not as complex as it appears and it might help you to get over the burden of financial obligations in a much more convenient way. However, when it comes to debt consolidation people have a lot of confusion and doubts. In order to demystify all the myths and clear your doubts in this thread, we will shed light on everything you need to know about debt consolidation.

Understanding the Concept and Meaning of Debt

In simple terms, debt can be defined as money borrowed by one person/party from another person/party. Debt is not just limited to an individual level but is also quite prominent amongst corporate houses and firms. Debt is typically used by firms and companies to purchase goods/ products/ raw materials that they wouldn’t be able to afford under normal financial circumstances. A debt system allows buyers and business owners to carry out necessary finance-related activities without hindrance. Debt arrangements usually provide required permission to borrow capital under a condition that it has to be paid back within a fixed frame of time with interest.

Some of the most common for debts that we come across in our day to day lives are mortgage aka home loans, personal loans, credit cards, car loans, etc. This form of debt is organized and allows the debtor to borrow money in order to fulfill their financial needs such as purchasing a house in case of a mortgage, managing day to day expenses in case of credit cards, and buying a house in case of car loans. Another major type of debt that is useful for business owners, companies, firms, and corporate houses is corporate debt that comes in various forms like bonds, commercial papers, etc.

The borrowed capital has to be returned to the financial institution along with an applicable rate of interest over a time period of several years based on the loan agreement. credit card debts work in a slightly different way when compared to conventional loans because the borrowed capital changes over time-based on the requirement of the debtors need to a certain extent known as the limit. The repayment system also works in a different way as it is the open-ended system it allows the debtor to repay the debt as per their convenience, however, with delay in the original repayment date there is an implication of heavy interest over the principal amount.

Debt Consolidation

A common scenario that a lot of expats face while residing in the emirates is the accumulation of debt via different sources which makes it very difficult for them to settle the financial obligations. Inconsistency in making the repayment of debts not only affects the credit Score but also entitles the financial institution to sue the debtor. In such a situation, the debtor should directly reach the financial institution or the lender to agree on common terms in order to settle the debt. When it comes to settling the debt that is when debt consolidation comes into the picture.

Debt consolidation is a strategy that allows debtors to escape debt trap by merging multiple debts into one so that it can be repaid easily via a management program or loan. Debt consolidation programs are highly effective in dealing with high-interest debts like credit cards and work by lowering down the applicable interest making it convenient for the debtor to repay the debt. Debt consolidation reduces the financial burden over the debtor making it easier for them to make ends meet during such phases of financial instability. The relaxation obtained by the debtor is mainly due to the fact the debt-relief strategies compile the debts into a single source leading to one payment once a month which saves money and offers peace of mind.

Debt consolidation can be classified mainly into two categories based on the framework they follow to settle the debt, here’s a rundown-

  • Opting for a loan to settle the debt
  • Opting for a management program to settle the debt

The initial functioning strategy works in a similar manner for both the ways i.e. by reducing the monthly interest applicable over the total debt amount which eventually reduces the monthly payable fragment to an affordable amount easier to manage by the debtor. To understand how exactly debt consolidation works let us consider an exemplary situation,

Suppose you have an outstanding debt equivalent to AED 350000. The debt is accumulated from different forms of credit i.e. car loan, personal loan, and credit card bill. In the table below the payable rate of interest is mentioned.


Interest Rate


Car loan



Personal Loan



Credit Card



The outstanding amount of AED 350000 is accrued from different credit sources with different rates of interest which makes it difficult for the user to repay the debt. However, if the debtor opts for debt consolidation the interest rate would be lower than the current rate reducing the amount the debt and the financial burden. With an interest rate of 6.5% over the debt consolidation loan the user will end up paying AED 286000 instead of AED 350000.

Benefits of Debt Consolidation

Debt consolidation is an effective process that helps people to combat their outstanding financial obligations without struggling. Here is rundown on some of the major benefits of debt consolidation-

  • Easy to look after deadlines of payments
  • Rate of interest is comparatively lower
  • Helps to maintain a credit score
  • Provides peace of mind and reduces stress
  • Lesser amount of capital spent monthly to consolidate debt

Debt Consolidation Loan

The most popular and the probably the most convenient method of consolidating the debt is to apply for a loan from either a financial institution or an online lender. The loan should be equivalent to the total debt so that it can be eliminated in one go. Once the debtor repays the outstanding debt using the debt consolidation the total amount of the loan is broken down into easy to pay EMI that can be paid by the debtor. The interest rate applicable to the debt consolidation loan can be negotiated based on the current financial situation of the debtor and the repayment payment typically varies from 3-5 years.

Debt consolidation loans are nothing but a special type of personal loan in the UAE that is meant to help people stuck in debt. These loans work by merging all your debts into one with makes it one installment every month that will eventually settle the debt. The best part about debt consolidation loans is that they effectively manage multiple repayments to different creditors with different rates of interest into one. These tailored loans lower the monthly premium as the interest rate is lowered along with an increase in disposable income.

Creditors analyze your credit reports closely while agreeing upon the rate of interest that is to be charged over the loan amount. Usually, if you are unable to repay your credit card debts there is a very high probability that your credit score is dropping simultaneously. If the rate of interest that is implicated on the debt consolidation loan is not lower than the interest rate implicated on the credit card bills there is no point in opting for the loan.

Features and Benefits of Debt Consolidation Loans

The features and benefits of debt consolidation loans are as follows-

  • Lowered rate of interest, therefore, lower premiums
  • Increased Income (Disposable)
  • Reduced Payment over the entire lifecycle
  • Longer Repayment Tenor
  • Efficient to Manage
  • Available with a deferred payment period

Eligibility Criteria and Documentation

In order to apply for a debt consolidation loan, one needs the following documents-

  • Passport
  • Emirati ID
  • Salary Transfer certificate (Varies from provider to provider)
  • Bank statements from the last three months or Salary Slips

Debt Consolidation Without Loan

Apart from opting for debt consolidation loans, there are numerous other ways in which one can settle outstanding debts effectively without disturbing their individual finances. One of the most effective ways is debt management programs that are offered by various debt management/consolidation agencies. These debt management programs do not require debtors to opt for loans as these agencies work in co-ordination with credit card providers and other financial institutions that reduce the rate of interest for the debtor. Reduction of the interest rate makes the outstanding debt payable for the debtor reducing the financial burden from the shoulders of the borrower.

Debt to Equity Ratio

When it comes to understanding debt as a financial tool, an important point to be kept into consideration is the Debt to equity ratio (a type of leverage ratio) commonly known as gearing or risk ratio. Before we dive deep into the nuances of debt to equity ratio it is vital to have a clear understanding of leverage ratios. Similar to other financial ratios, the leverage ratio indicates the presence of one entity against the other.

In simple terms, a leverage ratio is defined as a financial ratio that is an indicator of the total amount of debt incurred by an organization against the various other accounts within their income statement or balance sheet. Leverage ratios provide a detailed insight into the financing structure of a company allowing users and investors to get an understanding of how the major operations of the organization are being financed in real-time. There are different types of leverage ratios, here’s a quick rundown-

  • Debt-Asset Ratio
  • Debt-Equity Ratio
  • Debt-Capital Ratio
  • Debt-EBITDA Ratio
  • Asset-Equity Ratio
  • Asset-Equity Ratio

Debt to Equity Ratio Formula

The debt to equity ratio that can be mathematically represented as the total debt/total equity that calculates the extent or weightage of the total debt/ monetary liabilities against the total equity of the shareholder. Contrary to the Debt-Asset ratio that uses the total assets of the organization in the denominator the debt-equity ratio uses the total equity. The debt to equity ratio is a potential indicator of the inclination of a company or business model towards equity or debt financing.

  • Debt to equity ratio can be easily calculated by dividing the sum of total debts (long and short term) by the equity of the shareholder i.e. D-E= Total Debt (Long+ short term)/Shareholder’s Equity.
  • Debt Equity Ratio (D/E) = Short term Debt + Long term Debt/ Equity of the shareholder, i.e. SD+LD/ E

Typically, a high debt to equity ratio represents that an organization can efficiently manage its debt via an effective flow of capital along with using the leverage to improve the equity returns. By increasing the debt to equity ratio one can easily increase the return on Equity substantially since utilizing debt instead of equity leads to minimization of equity account providing high returns on equity.

Debt Collection

The process of collecting outstanding debt by the financial institution is defined as debt collection. Most of us at some point in our lives have opted for debts willingly or unwillingly from different sources be it credit cards, loans, or unorganized sources. Ideally, the debtor is supposed to repay the debt within the given frame of time along with an applicable rate of interest over the principal amount. When the debtor is unable to repay the debt on time the financial institution i.e. the creditor sends an official notice followed by taking legal against the borrower. The entire process is usually carried out by specialized debt collectors or debt collection agencies.

Debt Collector   

As a final option to collect the amount financial institutions take help from debt collection agencies. Debt collection may be defined as a collection strategy picked up by banks and lenders to collect their debt from borrowers. Debt collection involves professional debt collectors that are companies specializing in collecting unpaid debts for financial institutions and lenders. The original creditor with which you would have created the debt will eventually transfer your case to the debt collection agency after you would miss several repayments without any formal information to the lender. From the creditor’s perspective opting for debt collection agencies turns out to be quite cost-efficient and effective in collecting the debt.

Debt collection agencies make use of numerous approaches to collect unpaid debt from the debtors. Typically, when the debt collection agency receives your file from the original lender, they begin the collection process by calling your personal contact numbers and employer’s number repeatedly followed by sending legal notices to your residence and work. Some of the collectors even show up at the residence and work of the debtors in an attempt to collect the debt, which is legally acceptable. Once the debt collectors realize that you are dodging their calls and legal notices the next step in the collection process is sending validation deadline. The primary objective of sending the validation deadline is to gather proof that you owe an unpaid debt to a financial institution. Debt collection agencies are bound to follow a set of practices that fall under Fair debt collection practices act while collecting any sort of outstanding debt.

Your credit report is affected adversely when your original creditor transfers your file to a debt collection agency. Your credit score/ reports are based on the information from your credit accounts that includes credit cards, loans, etc.  Your creditors send monthly reports centered around your repayment that plays a major role in building your credit report. Your credit score drops steeply if a collection appears on your credit accounts which increases the probability of denial in the future when you apply for loans or credit cards.

Leaving UAE with a Debt

As mentioned earlier a significant portion of the total Emirati population comprises expatriates. Very often, expats opt for credit via different sources and then leave the country without repaying the outstanding debt. People opting for any type of loan or credit in the UAE should be essentially aware of the fact that unlike the west debt in the Emirates is considered as a legal matter which rather than a civil matter. If a debtor is unable to repay the debts to the financial institution without any specific reason, the bank/ institution is entitled to take legal action against the debtor that might end up in a prison.

An important point to be kept in consideration here is that the debt is not paid by the prison sentence but it is a reaction against not paying debt on time. Once the preliminary sentence is completed the debtor is released. The court provides a time of 30 days to repay the outstanding debt to the respective financial institution if the debtor is unable to make the payment the credit is entitled to sue to the borrower after which the court will sentence them indefinitely till the amount is collected.

Leaving UAE with Credit Card Debt

Credit card is one of the most widely used and the easiest form of credit to avail all across the globe. The majority of cases reported where expats flee out of the UAE with outstanding debts belong to credit cards. Credit card providers charge heavy rates of interest which makes it difficult for buyers to repay the debt. When an expatriate escapes the UAE without settling their bill there are several steps that are followed to recover the amount.

First of all, the bank lodges a complaint against the debt which involves the police and the immigration authority. The case is further reported by the immigration authorities to the CBU (Central Bank of the UAE) and the credit bureau. Based on the debt amount the immigration in close accordance with the financial institution and CBU starts tracing the defaulter overseas quickly or slowly. Typically, the higher the amount of debt quicker will be the tracing process. The traces are sometimes carried for years in order to recover the debt.

Ideally, one should never indulge in fleeing a country with an outstanding debt as it not only affects your credit rating extensively but also makes you a criminal in the eye of the law. Instead of fleeing the country, debtors should opt for debt consolidation which will smoothly settle the debts.

Leaving UAE with Personal Loan Debt

Right after credit cards, the second most opted form of credit in the UAE is the personal loan. A large number of expatriates opt for personal loans in the UAE to counter strokes of financial uncertainties. Personal loans are easy to avail, low interest, unsecured loans that are disbursed in a period of 24 hours. Just as the case with credit cards a lot of expats opt for personal loans and then flee the country without repaying the debt. The overall process after the debtor leaves the UAE with any form of loan is pretty much the same.

Leaving UAE without settling financial obligations is something that affects your financial health in the long run. Once the financial institution files a complaint against you it will affect your future travel plans and loan applications. Debtors should try to repay the debt as escaping the country is not a way out.

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