Falling into debt can be an easy mistake to make in the UAE. But these four residents managed to pay off their liabilities and learn a life lesson in the process.
Steer clear of the debt trap in the UAE
Ankit Rawat, a photographer, learnt about the downfalls of debt the hard way. In 2011, the 25-year-old Dubai Motor City resident owed about Dh30,000, a combination of credit card debt and cash he had borrowed from friends. “My low-paying job at the time as a sales consultant in a construction-orientated company made things really tight. I used to be hand-to-mouth at the end of every month,” says Mr Rawat, who is from India.
Because of his low salary, no bank would give him a credit card, which is why he reached out to friends to help finance his apartment rent. “Soaring rent prices and the basic cost of survival drove me to ask my friends for money. After a while, my salary increased and I was able to get a credit card too. This is when I started to live off it, which wasn’t wise but I was short of options,” he explains.
Mr Rawat says he never liked being in debt, so he decided to learn how to live on a low budget. He stopped dining out, didn’t buy any new clothes and held off from buying a car until he had cleared the debt, which took him about a year. “I always hated owing money and I always will. The experience changed my outlook towards how I spend. My dad always said this realisation would come to me and it did. I just can’t do it again,” he says.
Whether it’s a loan, a credit card or borrowing from friends, it can be easy for UAE residents to fall into debt. Banks are currently lending at the fastest rate since before the credit crisis, with total lending rising by 9 per cent last year to reach Dh1.29 trillion, its fastest growth rate since 2008, according to Central Bank data.
Two-thirds of the population have at least one credit card in their wallet – a figure that rises to 85 per cent for expat westerners – according to a 2013 survey by Souqalmal.com. So it’s not surprising Keren Bobker, a senior consultant at Holborn Assets and the On Your Money columnist for The National’s Money section, says she has encountered a number of residents with credit card debt that exceeds their annual income. “Banks appear to have tightened up on lending criteria, but we also have a personal responsibility not to take on debt that we cannot service,” she says. “Personal loans are relatively easy to get in the UAE, as are credit cards, so far too many people have debts they probably should not have taken in the first place. Some are seduced by the spending culture and find themselves in difficulties down the line.”
When Sarah Anderson, a 32-year-old British PR manager, first moved to Dubai in 2007, she was earning a monthly salary of Dh9,000. She arrived debt-free, but quickly found that her wage wasn’t enough to lead the life she wanted in the UAE. “I won’t say that I was overly frivolous or anything, but I was single at the time, so whenever my friends wanted to go out, I would join them. Eating out and partying definitely sucked up a lot of my cash back then,” she confesses.
Her bank offered her a credit card to go with her bank account, so she took it with the intention of using it for emergencies. However, she quickly found her salary covered only her month-to-month expenses, so she used the credit card to book airline tickets home every six months. “If it wasn’t for the credit card, I would have never been able to go home to visit my family, whom I’m really close to. I have no regrets, but the debt quickly racked up,” she says.
By 2010, she had accumulated approximately Dh30,000 of credit card debt and found herself only paying the minimum payment every month. During the same year, however, she managed to get a new job, which paid Dh20,000 a month. She then vowed to clear the debt. “I made sure it was a priority, so every month Dh5,000 would go directly on to the card until I paid it,” she explains. “Once it was paid, I started saving that money instead and over the years I’ve managed to save a tidy little amount. It feels great to have savings instead of debt, but having the better salary has definitely aided that.”
But credit cards are not the only financial product causing problems.
In 2013, retail loans made up almost half of Abu Dhabi Islamic Bank’s total loan lending, according to EFG Hermes. For Dubai Islamic Bank the figure was 44 per cent.
And according to Ms Bobker, many expats are not only servicing debt here but in their home nations as well such as loans, credit cards and mortgages. “A significant percentage move to the UAE with credit card debts and the intention of repaying them – most do that within a year or two,” she continues.
Rajat Sharma, a 27-year-old Indian engineer, had a student loan of more than Dh100,000 in India, which he took out in 2004. But the Dubai resident says he received a nasty shock when he saw the loan amount reach Dh150,000 due to interest over four years. “Because of the economic climate in 2008 and 2009, the loan that I had taken at 11 per cent interest per annum was at 16.5 per cent when I started paying my instalments,” says Mr Sharma.
However, after graduating and securing a job, he worked hard to pay the loan back, making a number of lifestyle sacrifices to ensure he did not miss a payment. “I travelled by Metro every day to work, which is a sacrifice considering the heat and connectivity. I also didn’t go out with friends much, didn’t shop or travel a lot,” he adds.
For some, the stress of being in debt not only means financial sacrifices but also a deterioration in mental well-being. Megan Neethling, a 27-year-old South African business development manager living in the Barsha area of Dubai, accumulated Dh85,000 in credit card and loan debt in 2009. She had taken the loan out to pay for driving lessons and to buy a car, while the credit cards meant for emergencies were soon used for shopping sprees and dinners out.
Sadly, the stress of being in debt led to a breakdown two years later.
“I was unable to make the payments as my salary was based on commission and I didn’t have enough,” says Ms Neethling. “When I had the breakdown, I got financial help from my family, who had no idea that I was even in debt. I was given enough money to pay off my highest credit card; I didn’t have much left to pay on my loan and smaller credit card, so I finished paying those off myself once I changed jobs,” she says.
Ms Neethling says the experience left her a nervous wreck because she had to keep her situation a secret.
“It was a great life lesson and it taught me not to spend what you don’t have. If you can’t afford it, you should just save to be able to purchase or plan the holiday instead of buying one on impulse,” she adds.
When it comes to paying off liabilities in the UAE, Jessica Cook, a private client adviser for AES International, says expats should consider consolidating everything into one loan. “Many banks are extremely forthcoming with loan arrangements. A loan can help someone to consolidate debt and make it far easier to manage. It is very common in the UAE to have credit card debt sprawled across various accounts with different banks – a loan from one institution will enable you to clear credit card debt, while allowing the debt to be easily managed,” she advises.
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