Personal loan is an unsecured loan offered by banks and Non-Banking Finance Companies to the interested borrowers. These loans attract higher interest rates because they are unsecured and the borrower doesn’t have to secure the loan with a collateral. The risk taken by the lender here is significantly high, hence the higher rate of interest.
Individual and organisational lenders in the UAE do not offer the same personal loan interest rate to all the applicants. Various factors affect personal loan interest rates in the UAE. And to find out an ideal interest rate for a specific individual, these lenders use personal loan calculators.
With the help of personal loan calculators, both applicant and lender can evaluate an approximate interest rate along with monthly EMIs that the lender needs to repay during a pre-decided tenor. To calculate the EMI and interest rate, one needs to enter basic details like monthly income, credit score, loan amount, etc.
In this article, we will take you through a list of reasons that explain why personal loan interest rates in the UAE are higher than any other loan.
Reasons Why Personal Loan Interest Rates Are Higher
Here is a list of three primary reasons why personal loan interest rates in the UAE are higher.
- No Collateral Required: Personal loans are unsecured loans and do not need any guarantee or collateral. And when there is no collateral, there is no guaranteed repayment for the lenders in case of defaulter borrowers. This leads to higher risk, and to adjust the risk factor, lenders tend to charge a higher interest rate on personal loans.
- Higher Default Rate: Personal loans are provided based on the repayment capacity and credit history. For other type of loans, such as car loan, home loan, etc., when banks auction the property, they get a chance to recover the outstanding loan amount. However, with personal loan, this opportunity is minimised to zero. There is no asset or collateral security against personal loans increasing the risk of loss if the borrower defaults. Most banks in the UAE face an increased percentage of Non-Performing Assets (NPAs). They charge higher interest rates to compensate for the same.
- Urgency of Funds: Personal loan is the only kind of loan that offers the freedom to use the funds as per the borrower’s needs. People choose to take personal loans only in case of financial emergencies, such as paying off debts, wedding expenses, settling medical bills, etc. Financial institutions take advantage of such urgencies and offer personal loans with higher interest rates.
Factors that Affect Personal Loan Interest Rates in the UAE
Here are the major factors that may affect your personal loan interest rates in the UAE.
- Nature of the Employment: Most banks calculate interest rates based on your nature of employment. They check if you are salaried or self-employed before they provide you with a personal loan.
- Income: The banks and other lenders in the UAE take the applicant’s income into account while evaluating the interest rate. Even the personal loan EMI calculator also requires you to enter your income with other important details that are helpful in calculating loan EMI. The banks usually offer lower interest rates to the applicants with high income as they are more likely to repay their loan EMIs on time, reducing bank’s risk. On the other hand, the applicants with a lower annual income may have to pay a higher interest rate.
- Employer Details: The reputation of your employer also affects the personal loan interest rate in the UAE. If you work for a well-established and reputed organisation, the lenders are more likely to offer you a lower personal loan interest rate.
- Age: The applicant’s age is an important factor that affects personal loan interest rate. People approaching retirement age may need to pay higher interest rates.
- Relationship with the Loan Provider: Existing customers of most banks get to pay lower personal loan interest rates provided that they share a healthy relationship with the bank.
- Credit History: Banks in the UAE evaluate your credit score before providing a loan. A good credit score can help you get a lower interest rate.
How to Get Lower Personal Loan Interest Rates in UAE?
If you need urgent funds and are planning to apply for a personal loan, here are a few tips to help you get lower personal loan interest rates in the UAE.
- Compare Interest Rates: You must visit online portals of multiple banks and financial institutions to compare the interest rates before you apply for a personal loan. This helps in availing of a personal loan at reasonable interest rates.
- Improve Your Credit Score: If you have a good credit score, it means you are creditworthy. All the banks and lenders check your credit score before approving an application for a personal loan. They prefer providing loans to borrowers with high credit scores and good credit repayment history. There are chances that they reduce the interest rates if they find that their funds will be secured repaid by you.
- Avoid Missing Loan EMIs: Your credit score gets affected if you miss your loan EMIs. Banks in the UAE check your loan repayment history before providing you with a personal loan. And if they find that you have paid all your EMIs and other dues on time, they may charge a lower personal loan interest rate.
- Negotiate with the Lender: Most banks provide their existing customers with leverage of negotiation. If you share a good relationship with your bank, you can always negotiate for the lowest possible interest rate. Make sure you submit a formal written request for the same.
- Keep Checking Loan Offers: You must keep an eye out for limited time loan offers. Most banks usually offer special personal loan interest rates in the UAE during festive occasions. If you apply with such an offer, you may be offered a lower personal loan interest rate.
The Bottom Line
Now that you know why personal loan interest rates are high and how you can get these rates reduced, you can easily evaluate the pros and cons of a personal loan and how beneficial can this be in your particular case. Banks and NBFCs consider a variety of parameters to develop a personalised interest rate for a specific individual. Make sure to compare different options and use a personal loan calculator to evaluate your interest rate before finalising your lender.