What do Banks Consider While Settling Bad Debts in UAE?

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Debtors are often obliged legally and morally for paying their debts to the financial institution. In such scenarios settlement turns out to be the last option during times of hardships. When debtor s is unable to make payments due to financial instability there is still some hope. They can reach out to their banks to find a common way out, which is an agreement on the repayment scheme. The majority of the settlements end up with the debtor paying back the principal amount of the debt to the bank waiving off penalties, surcharges, and interests.  

Bank operations are generally regulated as per the government norms. Waiving off a part of the receivables is the last option; so debtors must show good faith in the settlement. Banks usually prefer to have clean balance sheets and want their customers to have a healthy credit report; therefore, it is very unlikely that banks refuse settlements as long as the debtor has a clean record. A classic example to be quoted here is of a Filipina expatriate Andrea who paid off a total debt amount of Dh 1.7 million with Dh 15,100. 

All in all, no one strategy fits all the cases, hence, after analyzing the case one should consider multiple available options like one-time settlements or long term payment plans based on repayment capacity. The primary objective is to provide a strategic repayment plan to enable clients to become debt-free. Banks are quite supportive when it comes to understanding the issues that clients have been facing especially if the root cause is job instability, unexpected medical expenses, etc. 

If you are struggling with repayments of personal loans, education loans, etc. then here’s a list of factors that banks consider when settling bad debts in UAE.

Paying Capacity

The most important factor that is considered while settling loans in UAE is the payment capacity. Banks take into consideration the changes that have occurred in the personal circumstances from the time the loan has been issued along with the current financial status of the debtor. In case the borrower has a good credit Score and payment history in the past then the institution might consider holding on to the payment for a short span of time.  

Within the payment capacity, the banks will take into consideration the current salary of the borrower, probability of a co-borrower or an individual who can act as a guarantor, any bounced cheques that have been signed by the borrower in the past, property, and assets in the UAE/native country along with the current maintenance expenses of their family. 

Personal Circumstances of the Borrower

The personal circumstances of the borrower include the present salary, total amount of possessions and assets of the borrower in the UAE or elsewhere, history of bounced cheques if any, current maintenance needs of the family health, and the age.  

Getting involved in the repayment plan will help you repay your debts although there are some legal and financial repercussions associated with it. Debtors should be aware of the fact that banks are governed by guidelines imposed by the law. So it is always the judiciary that makes the final call.

A very common misconception, a lot of debtors have is that the insurance company will pay for their loan. If it’s the insurance company that pays for your loan in the UAE then the insurance company will enforce the right of the financial institution to collect it from you.

Insurance and Job Status

Insurance companies will pay only the minimum amount due for a specified period. Termination as per the law or resignation will not be covered. An important thing to remember is that you need to file your claim and it is not an automatic process, hence once you are repaying an outstanding debt it is your duty to contact the insurance provider and initiate the process. 

In case you surrender your vehicle, it will not change the status of your outstanding financial obligation when you’ve opted for a car loan. In the majority of the cases, the amount obtained by surrendering the vehicle is not enough to repay the debt. To put this in simple words, if the value of your vehicle is less than what is to be paid to the financial institution then you are still liable to pay the amount to the bank. 

In a Nutshell

If you are struggling with a personal loan in Dubai or you have defaulted several loans always consider the legal ways out of the situation instead of going for unfair practices. Contact the collections department of the bank and apply for settlement. With proper and sound understanding about the various factors that are considered by the banks, you don’t need to worry about your debts, just choose a suitable repayment plan and you are good to go!

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