Easy tips to avoid heavy debts in UAE

KT Archives /Dubai
Filed on May 16, 2017
 Easy tips to avoid heavy debts in UAE

(Picture via Kiplinger)

Follow these and you will not run into trouble

UAE residents adopting a lavish lifestyle and taking excessive loans they cannot afford are increasingly putting themselves at risk of long-term debt, the region's largest financial broker experts warned.

As oil prices drop to the lowest rates the world has witnessed in decades, and regional businesses face cutbacks, responsible spending has become the mantra of 2016 with many of the country's residents striving to save more and spend less. However, the privileges that many have been enjoying for years makes this lifestyle change easier said than done, say experts.

Average consumer debt in the UAE reached $95,000 per household, or $114 billion in total, according to a regional study by research firm Strategic Analysis. The survey found that 48 per cent of those polled said that their monthly income was not enough to cover their repayment obligations, with 60 per cent saying a quarter or more of their salary was spent on paying back debts. Of the total GCC household debt, the report said that the UAE represented roughly 67 per cent.

Here are some tips on how to avoid running into debt while in the country:

Don't underestimate budgeting

Many of us don't give enough credit to the humble budget, more so in the case of single men and women. And getting so caught up in living the good life in a city that never falls short of things- to-do and places-to-be, means that we often forget to take a closer look at our financial statements.

To avoid rude surprises at the end of the month, budgeting is an absolute must. A well thought-of budget can keep track of your income and expenses, and help you better manage your finances, make cutbacks where necessary and achieve long-term financial goals.

Keep a spending log

This will help you identify the areas where you are overspending. You can either keep a diary in a notebook or take advantage of the many personal finance apps now available - often for free - that help residents track their spending. To ensure you get the most out of this exercise, note down everything you spend, literally everything - right down to the Dh1 you spend on a bottle of water. It is also worth going through your bank and credit card statements to see exactly what you have spent on in the past. Keep the diary for a month to help you spot any overspending trends that can be trimmed back.

 Make cuts

Now decide what lifestyle changes you need to make to ease the debt burden. Ask yourself what you really need and what is actually a luxury. For example, a family with two cars could sell one car and take it in turns to use the remaining vehicle. Taxi fares here and there will almost certainly work out cheaper than the cost of running a car when you consider car loan repayments, car insurance, fuel and servicing costs 

Don't get swayed by luxury

One important tip for any expat would be not get swayed by the luxury of the city and hurt your savings. There might be a temptation to upgrade your car, live in a fancy area, try the new restaurants around the block, but always rationalize your spends. It's okay to splurge once in a while, just don't make it a habit.

Avoid credit cards and loans

As soon as you open a bank account, you would get a call for a free credit card or an 'easy loan', but it is better to stay away. Credit card debt is no doubt the worst and most expensive form of debt. And the culprit is the steep interest or profit rate on credit cards. Don't let that seemingly small number of 2.99 per cent to 3.25 per cent per month mislead you. When converted to an annual rate or APR, interest rates on credit cards in the UAE can touch a whopping 40 per cent on average!

Don't forget to pay your credit card bills on the due date as it can cost you a premium for late payment.

Shop during festival season

Dubai is home to all the global fashion brands and you might end up spending most of your weekends in the grand malls. Resist making impulsive purchases and look for discounts through the year. Make the bulk of your purchases during the Dubai Shopping Festival as you can save a lot of money.

Keep your credit report in mind

With the Al Etihad Credit Bureau up and running now, your credit report can now easily be accessed by banks in the country. And every credit card payment you miss, or loan installment you don't pay on time, will now form your official credit history which may come to haunt you later. Banks will judge your credit worthiness based on your credit report, so it's important that you keep track of the debt you owe and only take on debt if you can afford to repay it. For example, it's advisable to avoid taking a personal loan that you can't see yourself comfortably paying off in the future or splurge with your credit card if you can't pay the outstanding amount when it falls due.

Open a savings account

You may already have a savings account. But do you pay into it regularly? Or is it simply an add-on to your current account that you might use to house a few emergency dirhams? If you're struggling to build up a decent chunk of savings, the best suggestion would be to compare savings accounts that require a minimum balance. These are the ones that pay out higher interest rates, and many of them come with monthly giveaways for top savers. Work out where you can afford to cut your outgoings, and put the savings away into one of these accounts. You'll thank yourself a year or so from now.

 Compare financial products

Not every financial product is right for every individual. Use a comparison site to see what products are out there and make sure you come to an informed decision on the financial products you purchase.

 Control your debt-burden ratio

Your debt-burden ratio is the amount of debt payments you have going out relative to your monthly salary. So if you earn, say Dh20,000, and you have monthly loan and credit card payments of Dh10,000, your debt-burden ratio is 50 per cent - which, you should know, is the legal limit in the UAE. Try and avoid getting anywhere near that 50 per cent limit. Ideally, you should be aiming for about 25 per cent to 30 per cent in order to give yourself wriggle room in case you ever need to take out additional credit. 

Downsize your vehicle

The UAE's Insurance Authority has just announced new regulation that sets new minimum premiums for motor insurance. As a result, if you've got an SUV, you're looking at a minimum of Dh2,000 to comprehensively cover it. Work out whether you need an SUV, and perhaps think about downsizing to a saloon car.

 Debt consolidation

Debt consolidation involves combining all your existing loans and credit card debt into a single loan, usually done to take advantage of lower interest rates, longer tenures and smaller monthly repayments. This is different from debt restructuring, under which you can approach individual banks to restructure your loans. This may involve extending the loan tenure, lowering the monthly installments or taking a payment break to help you cope with debt repayment.

Zero Sum Budgeting

This budgeting technique leaves you with zero money, once you deduct all expenses from your income. Don't worry, that's not a bad thing in this case! Prioritise your expense categories, with loan repayments at the top followed by basic household expenses and emergency savings, and all miscellaneous spending right at the bottom. The next step is to split your income based on these priorities, without leaving anything behind.

Boost your income

Consider whether there's any way to boost your take-home pay. If you get a big tax refund every year, that means you're having too much withheld from your paycheque.

Make investments

Just parking your money in a bank account will not give you the attractive returns you could make by investing it. Explore for options like Systematic Investment Plans (SIP), mutual funds, bonds in your country or in Dubai to maximize buck for your savings.

Don't shy away from asking for advice

Financial ignorance can be detrimental. If you feel that you lack the financial know-how to make important money-related decisions, be it about which savings account to open or what investment avenues to explore, it's always a good idea to seek help from the outside. Expert guidance is available in all shapes and sizes. For example, if you want to invest in the stock market or in a retirement savings plan, you could enlist the help of a licenced investment advisor who can walk you through the options available


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