Abu Dhabi, UAESaturday 28 March 2020

The Debt Panel: 'Can the bank use my gratuity to pay off my loan?'

The Al Ain resident from South Africa, who is switching jobs, wants to keep the payment to buy a house

Illustration by Mathew Kurian 
Illustration by Mathew Kurian 

I plan to resign from my job in Al Ain to move to another post but only after securing new employment for similar pay. However, I have concerns over how my gratuity will be handled as I have an outstanding loan.

My concern is that in July I will still owe about Dh142,000 on the loan, so will the bank take the gratuity and use it towards that balance?

PS, Al Ain

I took on the consolidation loan from a bank in the UAE in July 2017 to clear debts here and in my home country of South Africa. I have faithfully kept up with my repayments since then, never missing a single payment. My outstanding balance on the loan is Dh181,000, with a monthly payment of Dh7,552. This runs until January 2022.

I have two interviews this week for a similar role to mine in the UAE and with a similar salary — both come with an August start date. I work in education and earn Dh17,700, with my monthly expenses coming in at about Dh7,000 a month.

My question is: will I actually receive my end-of-service gratuity payment in July? I expect to receive about Dh100,000 from my employer. My concern is that in July I will still owe about Dh142,000 on the loan, so will the bank take the gratuity and use it towards that balance?

Or can I simply give the bank my new employment details and keep my gratuity for myself? In the meantime, I would still pay the instalments on the loan. I would like to use the gratuity payout to put a deposit down on a house in South Africa. How do you think this will play out? PS, Al Ain

Debt panellist 1: Philip King, head of retail banking at Abu Dhabi Islamic Bank

The first course of action would be to review the terms and conditions of the loan agreement that you’ve signed with your bank to clarify your rights and obligations.

Since salary transfer loans warrant the transfer of salary and end of service benefits, the bank may use your final settlement to clear your liabilities.

You should consider putting a portion of your final settlement towards the balance of the loan so you could make a significant headway to being debt free.

Philip King, ADIB

However, make sure to notify your bank as soon as you’ve agreed terms for your new job. Let them know that your employer will change but that you will continue to fulfil the terms of the loan. You should also offer documentation providing proof of your new employment and income, such as an offer letter, job contract and a residency visa from your new employer.

It will make the transition easier if your new employer is categorised as an approved company for personal loans in your bank as they may agree to release your gratuity once your first salary is transferred from your new employer.

While this entirely depends on your contract and the discretion of the lender, following these steps may allow you to access your funds, including the end-of-service gratuity payment, and let you continue your instalments as normal. However, you should consider putting a portion of your final settlement towards the balance of the loan so you could make a significant headway to being debt free.

Debt panellist 2: Ambareen Musa, founder and chief executive of Souqalmal.com

Many borrowers in the UAE are left blindsided when they switch jobs and end up with a frozen bank account and inaccessible funds, only because they failed to inform the bank of the change in their employment status. It's wise that you are considering the implications beforehand.

Now that your consolidated loan is from your primary bank, the bank will automatically be notified when your end-of-service benefit reflects in the salary-linked account. The bank will then be prompted to freeze the funds in your account since you have an active outstanding loan with them. This is a cautionary step taken by banks in the UAE to ensure loan dues are recovered in case the borrower absconds and exits the country. However, there's a logical way to work around this scenario and avoid having your gratuity deducted and adjusted towards the outstanding debt.

Now that you are considering switching jobs sometime in July, you have enough time to reach out to your bank to understand their policy regarding change in the account holder's employment status and how such cases are treated. The norm may be to temporarily freeze a bank account as they assess the borrower's financial position and ability to repay the loan.

Understanding this protocol will not only help you prepare for any action that the bank may take, but it will also equip you with what you need to do to avoid having your account frozen in the first place. For instance, submitting proof of your new employment as soon as you have the offer letter, and doing so before your last salary and gratuity hits the account, would ideally leave the bank with no reason to block your account. The fact that you have diligently kept up with your repayments should also help prove your commitment towards repaying the loan on time.

Debt panellist 3: Keren Bobker, an independent financial adviser with Holborn Assets

When anyone leaves a job, it is standard practice for an employer to mark their last salary payment as "final salary" and for a bank to freeze the bank accounts, especially if there are any debts. As you have a personal loan, you can expect this to happen. What happens next may vary depending on the bank.

It is not uncommon for a bank to apply an end-of-service gratuity to a loan to reduce the amount outstanding but you need to check the terms of your loan agreement to see if there is a clause permitting the bank to use your gratuity payment in this way. If the clause is there, then the bank has the right to use the lump sum payments to reduce the total loan amount. Even with this clause, the bank does not have to do this, so I suggest you speak to them, let them know of your plans, and request that it is not used in this way as you would like to use the payment for another purpose.

As you have been a good customer, made all your payments on time, and will be moving to a new job with a similar salary, your overall situation will be unchanged and you can ask your bank not to apply the gratuity to the loan balance.

The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae

Updated: February 26, 2020 10:57 AM

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