I have a loan (converted from a credit card debt) for which my monthly repayments are Dh5,674. I have paid almost 11 months and have an outstanding balance of Dh118,000. I built up this debt by paying my house rent for two years on my credit card, so the bank offered to convert the card debt into a loan at 39.99 per cent annually. Now I am facing problems paying that amount back. I can only afford to pay Dh3,000, as my liabilities have increased.
I spoke to the lender to reconsolidate my loan and make the monthly repayment Dh3,000 but they did not agree. Instead they asked me to get a co-borrower as guarantor so they could reconsolidate the loan for more years. They said they could pull it up to 62 months with the existing interest rate of 39.99 per cent, where my EMI would be Dh5,300 for 62 months. I said this will not work out, as my salary is only Dh11,000. I also have an existing loan with another bank where I am paying Dh5,300. I took out this loan to start up a business in 2010, which did not succeed. The outstanding amount on this loan is Dh218,800. Today the first bank, which issued the card loan, called me and said I must settle my outstanding amounts immediately. They said if the cheque is returned unpaid, the bank would be compelled to file a police case and initiate legal action. I will be at risk of losing my job as a network administrator for the Dubai government and could face a jail term. I am totally broken. All of my salary goes on repaying debts. I understand it’s my mistake, but because of several circumstances my situation has become worse and it’s hard to manage my financial commitments. How can I handle this situation? SK, Dubai
Debt panellist 1: Keren Bobker, an independent financial adviser with Holborn Assets
As SK’s salary is only Dh11,000 per month, how has he managed to borrow so much? The total is clearly in excess of UAE Central Bank rules, as these state that the debt burden ratio must be no more than 50 per cent of a person’s income. SK has repayments that are all but 100 per cent of income. How did he expect to be able to make the repayments? Banks ask for confirmation of salary and of other liabilities, so were these not properly disclosed at the time of application? The Etihad Credit Bureau is supposed to prevent this from happening, but as a relatively new organisation its records may not be fully up to date and individuals must also take responsibility for their borrowing. In this case, it appears the two banks were not aware of the other debt or that it was not fully disclosed.
I have also not been advised which bank this, is but I am rather taken aback at an annual interest rate of 39.99 per cent. That is excessive, no matter the level of risk. According to circulars from the UAE Central Bank from some time ago, banks are not supposed to charge an interest rate higher than the one advertised and displayed, and I have to query whether a rate this high would be advertised. Even if SK is considered a high-risk customer, I do not see that any bank can justify this level of interest.
If a loan has been agreed by both parties, and we have to assume that SK agreed, it is not possible to go back to a bank and simply ask them to reduce the repayments. Why have SK’s outgoings increased? When repaying a large debt, it is not wise to take on any other commitments, and while it may be unfortunate that the business enterprise failed, this is not the fault of a bank – although in some cases some banks may consider increasing the period of the loan to reduce payments. I note that one bank has said it would consider restructuring if there is a guarantor; however, any guarantor would be jointly and severally liable for the debt, and so if payments are missed by SK the bank will expect the guarantor to pay. There are the same legal consequences for guarantors as for the main borrower.
Does SK have any assets that can be sold to reduce the capital outstanding? Does he have any way of increasing his income? Can any friends or family assist? He could make partial payments on the loans, as even making partial payments is better than nothing at all and may stall a police case until such time as he can come up with a way of restructuring the debt. Although the options may be limited, I wish him luck in his endeavour.
Debt panellist 2: Jamal Alvi, the chief credit officer at Abu Dhabi Islamic Bank
The importance of not using borrowed money to start a new business cannot be overemphasised. Most of new businesses fail within the first three years. The setback of dealing with a failed business venture is made more difficult when one has to deal with settling debt that was taken to start that venture.
Also, you must never use your credit card as a debt instrument, as it carries a very high interest rate. You could have simply taken a personal loan to pay your rent.
In any case, it is quite unusual for banks to convert credit card balance into an instalment loan at such a high rate (39.99 per cent). I suggest you approach that bank and negotiate a lower rate. You should be able to bring them down to 10 per cent or so on your remaining principal balance if your salary is assigned to that bank.
The Debt Panel brings together four financial experts: Jamal Alvi, the chief credit officer at Abu Dhabi Islamic Bank; Ambareen Musa, the founder and chief executive of the comparison website Souqalmal.com; Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life; and Keren Bobker, The National’s On Your Side columnist and an independent financial adviser with Holborn Assets in Dubai. Together they answer queries in a weekly online column to help readers better tackle their debts. If you have a question for the panel, write to firstname.lastname@example.org