UAE banks extend no-installment period for new loans to ease borrowers’ EMI concerns

DUBAI: Banks in the UAE extended no-installment terms to up to 3 months as an incentive for new loans to offset applicants’ concerns over high interest rates and EMIs. Most bank loan schemes promoted during Ramadan have this and cashback at the core of their offerings.

Not only that, but the UAE banking industry is making it easier to get new loans. The minimum requirements to be approved for a new loan are a Debt Burden Ratio (DBR) below 50% (the maximum allowed by the Central Bank of the UAE) and a credit score above 580.

The Etihad Credit Bureau has even partnered with Nova Credit to enable new residents to transfer their credit history from their home country when using financial services in the UAE. Until now, it has been extremely difficult for new expats to take advantage of the plethora of banking services available.

“While banks do due diligence before issuing a loan, at the end of the day, they want to sell a product,” said aid Shivansh Rachit, founder and board member of Hedge and Sachs. “Unless a customer has a bad credit score, it is still relatively easy to get a loan in the UAE. “Some borrowers take loans because it helps provide them with additional liquidity to build assets. Accessing credit facilities in the UAE is just as easy – you’ll get calls from credit card and personal loan salespeople on an almost daily basis. “

Even as lending rates continue to rise, consumer demand for credit facilities does not appear to be slowing down. Small personal loans and car loans between Dh100,000 and Dh250,000 are most popular with salaried employees (although car insurance is expensive), bankers and personal finance experts say.

Contrary to what some analysts say, UAE residents are not taking a wait-and-see approach when applying for loans/mortgages. For one thing, there is no guarantee that interest rates will fall in the coming months.

Prabhakar David, CEO of Inflow Financing Broker, said that for customers earning more than Dh10,000, the bank issues secured loans (for salary) at lower interest rates (less than 3.2%). The most popular personal loans are under Dh250,000. Residents choose personal loans for a number of reasons—for educational purposes, to buy a home in their home country, or to pay off an existing loan. “Demand for car loans is high (despite rising insurance amounts) as car dealers offer attractive packages during Ramadan,” said an official at a Dubai-based bank.

While floating-rate loans can be a better deal in the short term, that may not last if interest rates continue to rise. Amid multiple rate hikes, UAE credit consumers are better off locking in fixed-rate loans.

“The problem with floating rates is that it’s very difficult to speculate on what the rate will change at the end of the year,” Rachit said. Variable rates make it harder to budget because payments are volatile, and consumers could end up in financial trouble if rates spike. The 12-month Emirates Interbank Offered Rate (Eibor) – or the benchmark rate for lending between banks within the UAE – is 4.9%.

UAE banks offer expatriate loans (including salary transfers) at fixed rates of 3.14-3.58%. Personal loans without the payroll transfer option carry much higher interest rates (5.43-8.8%), depending on the bank. George Howard, Chartered Financial Planner at The Fry Group, advises UAE residents to lock in a fixed rate should they have to take out a loan. “Also, lenders need to be aware of the fees banks charge for loans,” he said. “Many banks charge arrangement fees, administration fees, etc.”

For consumers looking for a fixed-rate car loan, banks offer rates ranging from 3.75% to 9% per annum, which remain constant for the life of the loan. Variable rates start at 3.74-6.75% of the reduced balance per annum and may vary based on the EIBOR rate.

Regarding repayment options, lenders typically choose to repay at a fixed rate for two years and then at a variable rate for the remaining two to three years. Bankers have warned loan seekers to keep their Debt Service Coverage Ratio (DSCR) low and their Al Etihad Credit Bureau scores high to take advantage of flexible repayment options. “Outstanding utilities and EMIs must be paid on time to ensure a high credit score,” said a banker. Borrowers also need to check how much they still have to pay if they want to repay the loan early. “Always try paying extra to see if you can pay back faster,” she adds.