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Abu Dhabi, UAEWednesday 20 February 2019

The Debt Panel: ‘Will my bank let me clear my six-year Dh160,000 loan in 12 months?’

This Dubai accountant has extra sources of income and wants to clear the liability fast

Illustration by Mathew Kurian
Illustration by Mathew Kurian

I took out a four-year loan of Dh230,000 in 2016 when my salary as an accountant was Dh13,500. The repayments were Dh5,996 a month. Then in 2017 my salary was reduced to Dh8,500, so I asked the bank to reduce the monthly payment but they refused. I raised a complaint with the Central Bank of the UAE and my bank then reduced the payment to Dh3,230 in May 2018. However, it extended the new loan period to six years, meaning the debt won't be paid off until 2024.

I now owe Dh160,000 and my salary has gone up a little to Dh9,500. I also have extra sources of income from online jobs and a friend is willing to help me settle by giving me money over a one-year period. Will the bank agree to stop charging interest, so that I can pay off the outstanding balance of Dh160,000 in a year? I also have a credit card with an outstanding balance of Dh50,000 on which I will pay Dh2,483 a month for the next two years. I borrowed all of this money for my mother’s medical expenses and to renovate her house. I am from India and live in Dubai, with monthly lifestyle expenses of Dh3,500. I want to free myself of debt and make full use of my salary. Owing money is stressful and leads to health issues. SP, Dubai

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

You took the right decision to ask the bank to change the structure of your loan once your salary decreased in 2017. However, at the moment, you should be more concerned by your card debt than your loan. You will be paying a significantly higher rate on your card and you should aim to clear the Dh50,000 you owe before focusing on paying off the loan. I appreciate your unfortunate situation, but cards are not designed to be used as a long-term borrowing tool, such as for paying medical bills or house renovations. They should be for smaller, everyday purchases and, if possible, the outstanding balance settled each month. If you want to become debt free quickly, the focus should be to repay your card first.

I can’t see why the bank would stop charging on your personal loan. You have agreed and signed to these terms when you borrowed from the bank. There is no reason why you should receive a special exemption over anyone else with a loan. Once you have paid off your card, and if you want to reduce the balance on your loan in a hurry, you can aim to make substantial repayments of more than the monthly minimum. While you should save some money each month to manage a potential change in your personal circumstances, you can still direct a large portion of your earnings towards paying off the outstanding balance. This can ultimately save you money in the long term as it will reduce the time frame the bank is charging you for holding the loan.

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

It's highly unlikely the bank will waive interest and allow you to pay off the outstanding balance over a one-year period. Here's why: the idea of a bank restructuring your loan (a second time) and waiving all of the interest in lieu of receiving monthly installments over one year, sounds next to impossible. At most, the bank may be willing to consider a partial waiver of interest if you offer to put down a lump-sum payment towards the loan. Because gathering funds for a lump-sum payment right away isn't possible in your case, you should consider other options.

In fact, if you want to get rid of your loan within a year, there's an easier way of doing so that does not involve negotiating with your lender. Simply save up as much as you can over the coming months and once you've accumulated enough funds to repay the outstanding loan balance in its entirety, opt for an early settlement.

However, there's another aspect you need to consider more carefully. You also owe a significant amount of money on your credit card. And since the interest rate on your credit card is definitely going to be much higher that the interest rate on your loan, you should prioritise settling the card debt. You can use your savings and the financial assistance you're going to receive from your friend to repay the credit card balance first. Alternatively, approach the card provider to restructure your credit card debt into a fixed-interest fixed-tenure loan. At the very least, this will stop the unnecessary accumulation of hefty interest. You can then compare the costs of both debts and work towards settling them one by one.

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Debt panellist 3: Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life

Resolving your debt problems will bring you great relief. Well done for having a strong mental outlook to do this. It is so easy to fall down the spiral of being a victim and disregard any solutions that can sort out the problem.

Before you commit to rescheduling your loan with your friend over 12 months, be sure that this process is completely affordable. It's one thing to relieve yourself of debt as quickly as possible and another to completely overburden yourself with payments you cannot manage. Also consider the impact on your friendship if you are unable to stick to your commitment agreed with your friend.

As far as repaying the banks, start with the smallest amount, so target your credit card first. You are paying a much higher rate of interest on your credit card than on your personal loan. Repay in full and then move on to the loan. If you have a lump sum ready to go, ask the bank for a full settlement figure. Many banks are willing to provide a discount if you settle in full.

For your personal loan, the bank will not stop charging you interest. But, if you repay early, you will save on the interest due over the six-year tenure. Note, the banks will charge an early settlement fee for repaying before the tenure has ended.

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: January 22, 2019 01:18 PM

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