Coronavirus: Planning to take a bank loan now? Think again
Dubai - The reason is that after the Covid-19 pandemic, businesses might be in a bad shape.
Residents have to be extra vigilant while applying for a personal loan given the uncertainty that has emerged as a result of the Covid-19 pandemic, experts have said. Borrowing to buy stuff we don't need might lead to selling stuff that we need in order to repay the funds, said Colin Dallas, head of Retail at National Bank of Fujairah.
"Think twice! A personal loan is a deferred obligation aggravated by interest charges," said Alexey Nuzhnyy, master trainer of Finance at UV Consultants Dubai. "Do you have other options such as relatives and friends, or even your employer's support? Only when all such options are exhausted, should one approach a bank.
"Make a benchmark; many financial institutions and different personal loan options are available. Clearly define your time, target, and the bearable monthly payment. Match that with your personal earnings/spending budget," Nuzhnyy said. "Carefully consider your future capability of repaying the principal and the interest. Avoid the situation when you put yourself and your family in a financially dangerous situation."
Terms you should be aware of
Dallas advised residents to ask themselves if they have a sustainable income/continuity of employment to repay. Although banks will allow customers to go to a maximum repayment of 50 per cent of a customer's monthly salary, in the current environment it is imperative for customers to consider very carefully whether they can sustain these repayments for a prolonged period.
"We [banks] would also inquire about the purpose of the loan, and its urgency in these times, and if there is a buffer left for expenses, in case of an economic inflation," he said. "We would strongly suggest, before making any financial commitment, to really assess whether this is related to a need that cannot be avoided."
When applying for a personal loan, Dallas advised residents to be aware of the entire terms and conditions of each loan. These includes the repayment plan, fixed charges, any hidden charges, the insurance coverage and its cost impact, early settlement fees, and End of Service Benefits (EOSB).
"It is also important that they pay particular attention to the repayment schedule and dates to avoid any repercussions that can negatively impact a customer's ability to obtain credit in the future," he cautioned. "Customers also need to look out for the financial and reputational impact in case of any payment delay Late Payment Fee (LPF), score deterioration, Al Etihad Credit Bureau (AECB) impact, loan enhancement (top-ups, deferments), and the various repayment channels."
Look for the best interest rate
Kamal Lalwani, senior consultant at Nexus Insurance Brokers, pointed out that while the monthly payments may look small, it all adds up.
"Shop around for the best interest rate," he advised. "Ask for a detailed payout which includes all fees and charges. See what total you will have paid at the end of the tenure. Also, find out the early settlement charges. If you get a good bonus within 12-24 months, it may be a good idea to pay it off. Check whether your loan is backed up by a life insurance policy. Try and avoid non-salary transfer loans as the interest rate is usually high."
Nuzhnyy added that the rate of interest can either be fixed or a reduced balance. "The flat rate is lower, but do not be misled! Even in the last year of tenure, the interest will be calculated based on the original amount. Ask if there any additional costs, and if you can have a lower rate if you maintain a salary account with the bank."
K. V. Shamsudheen, founder and director of Barjeel Geojit Financial Services, advised expatriates not to take a loan at all. "The reason is because after the Covid-19 pandemic, businesses might be in a bad condition the world over. In such a situation, people may lose their jobs, resulting in repayment becoming very difficult."
Shamsudheen also noted that he always tells people never to take a loan from their credit card because the interest rate, plus various charges, will be higher compared to that of personal loans.