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Before we go ahead and explain what a loan is, it is important for you to be clear about the 2 different parties involved in a loan transaction, these are as follows:
A loan is a financial agreement or a financial transaction between these two parties i.e., the lender and the borrower. A lender can either be a group of people or financial institutions that are lending money to a group of borrowers or a single borrower.
A bank or a financial institution lends money to the borrower at their discretion. When banks go ahead and extend credit or funds to the borrower, there is an agreement made between the two parties known as the loan agreement. In this agreement, there are specific terms mentioned for a loan or finance. Generally, the banks charge a fixed rate of interest on top of the original loan amount. The money that the bank lends is known as the principal. So, there are 2 repayments that need to be made from the borrower’s end – the Principal and the Interest.
The borrower needs to agree to the terms set by the bank such as the principal amount, payment of interest, and the repayment due dates.
Lenders generally collect their payments via monthly payments equated on an EMI basis. This means that the borrower is required to repay a set amount of money during the entire tenure of the loan on a monthly basis. The due dates for repayment can be fixed as per the borrower’s requirement such as annually, semi-annually, quarterly, monthly, fortnightly, and so on.
There can be various types of loans such as a personal loan, home loan, credit card, business loan, and many more depending on the different needs of the borrower.
In the UAE, there are mainly 2 types of banks – Conventional Banks and Islamic Banks. Conventional banks that follow conventional rules while processing the transaction, and Islamic banks following as per the Shariah-law.
Below are the different types of loans offered in the UAE market.
These are kinds of loans that can be taken up by the borrower time and again. Credit cards, bank overdrafts, among others are some examples of open-ended loans. You are assigned a pre-set credit limit in your account. With every purchase or expenditure, the available credit limit or the loan limit reduces. In order to make use of this credit again, the account owner has to repay the amount due along with the interest. Hence, once the dues are repaid you can again make use of the available credit.
These are loans that once repaid, cannot be used again. You will be required to apply for such loans again in order to enjoy the benefits. For example, if you take up a personal loan and repay the entire amount along with the fixed personal loan interest rate, you will be required to go through the entire application process again if you wish to reuse such funds.
These are loans that are backed by a guarantor, an asset, or collateral. If the borrower is unable to repay the entire amount, the lender can liquidate the asset in order to compensate for the loan repayment. Prime examples of such loans are mortgage loans or home loans. These are types of loans wherein the property or the house is provided as collateral or security against the loan amount. If the borrower is unable to repay the loan, the bank or institution can foreclose the loan and then adjust the amount.
These are loans that do not require any collateral or underlying asset to secure them. All the financial institution or the bank gets is the borrower’s personal guarantee. A good example of such a loan is the personal loan in UAE, they do not require any security, and all that they need is the borrower’s personal guarantee against paying the loan amount at the fixed personal loan interest rate.
These are loans offered by banks that typically follow a conventional set of rules. Generally, a bank is referred to as a ‘conventional bank’ when the interest is applicable as a time value for the funds.
This is a kind of financing facility that follows the Shariah set of rules. As per Islamic Finance, interest is prohibited. The institutions that are Shariah-compliant charged ‘profit’ instead of interest.
The Bottom Line
We hope that we managed to clear out the major two questions in the borrowing market – what is a loan in Dubai? What are the different types of loans in the market of UAE?
Now that you are aware of these, make sure to review the various borrowers and interest rates charged before you go ahead and opt for the loan that suits your needs.