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Dubai: Parents in the UAE planning to take out some large personal loans to finance their children’s university education will have to do some tough calculations and budget planning. Because more than a decade later, the interest rate burden they have to bear gets higher every other month — until the Fed decides that rates have risen enough to keep inflation in check.
But that’s little consolation for those considering a loan, as successive rate hikes through 2022 are already taking a toll on demand. Mortgage growth slowed in early 2023, a continuation of a trend seen in the fourth quarter of 2022, banking sources said.
While many parents tap into their savings or systematic investment (SIP) plans, they also turn to high-interest personal loans to pay for their children’s college expenses. However, unlike in the West, banks in the UAE offer education loans to students based on their parents’ qualifications and financial status.
However, parents cannot get education loans unless their minimum monthly salary is Dh7,000.
Average tuition fees for undergraduate programs in the UAE range between Dh37,500-Dh70,000 per year. For postgraduate courses, the annual fee is Dh55,000-Dh75,000, excluding living expenses.
Studying abroad can cost up to Dh250,000 depending on the country and university chosen.
“In this case, students who want to leave the UAE for higher education cannot afford loans,” said Sandeep Jadwani, head of investment advisory at Habib Investment. “That’s why the loans offered are linked to the parents’ financial credentials.
“Education loans are still not very popular in the UAE because banks grant such loans on commercial terms, with repayment terms of four to five years (unlike the longer repayment terms available in the West).”
That’s why parents may need to think differently about raising money.
Asset-backed loans?
To ease the stress of paying school fees, personal finance experts say asset-backed loans are becoming a popular option for Emirati families seeking loans to pay for their children’s education. A “secured” loan is one in which the borrower puts assets as collateral.
That way, borrowers can seek higher loan amounts — at relatively affordable rates. Foreign borrowers can draw up to 75% of the asset value. Leading banks – including Emirates NBD, Dubai Commercial Bank, RAKBANK – offer such facilities for business owners’ personal and immovable assets. Loans can be used for personal purposes.
“When parents take out a loan from a bank in their country of residence, they face the risk of foreign exchange fluctuations,” Jadwani said. “This has seen many expatriate parents take out loans in the UAE and use their property as collateral, which is a popular option.”
high interest rate
However, higher interest rates still act as a deterrent to such loans. According to Damodhar Mata, a Dubai-based financial adviser, asset-backed lending rates in the UAE currently range from 5.9% to 6% per annum.
“Just a year ago, it was 1.99 percent,” Mata said.
For example, if one parent has assets worth AED 1 million in the UAE and an outstanding mortgage of AED 500,000. “Banks can release an additional Dh250,000 asset as a supplementary loan on the same property, which parents can use to pay for college fees,” he added.
The total loan amount for the parents is the outstanding mortgage plus the top-up loan, which is Dh750,000. In this case, the parents end up paying Dh14,253 per month at an interest rate of 5.29% for 60 months. Parents can obtain loans of up to 25 years to mortgage their property in the UAE.
“These are mortgage buyouts offered by the banks, in which case the parents should have a monthly income of Dh30,000 and above,” Mata said. (If parents use other credit products such as bank loans or credit cards, they may be in debt.)
Interest rates on personal loans secured by real estate can be relatively low because real estate is viewed by financial institutions as a reliable form of leverage.
What must parents looking for education loans pay attention to?
Parents must be careful paying off debt to support education if future job prospects are poor. Vishal Dhawan of Plan Ahead Wealth Advisors said: “It is also important that parents do not sacrifice their retirement savings when paying for education.
“According to the terms offered, if there is no other choice, parents need to evaluate between education loans and personal loans, and choose a loan with a lower interest rate during the loan period after considering fees such as processing fees, in addition to the interest rate.”
Parents also need to avoid credit card payments at all costs. “It’s the most expensive loan in the market and it leads to very high recurring interest rates,” said Sandeep Jadwani, head of investment advisory at Habib Investment Ltd. “Non-repayment can have a negative impact on their credit history.”
Refinancing?
Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, said that for parents looking to lower their interest bills, refinancing their loans through balance transfers could be an option. “Also, if their cash flow or monthly income allows them to pay higher loan installments, they should consider taking a loan with a shorter tenor so that the overall interest on the loan can be lowered,” Dhawan said.
What other options do families have for taking advantage of student loans?
overdraft
Some families also opt for an overdraft, which is common among salaried customers. An overdraft facility provides parents with instant cash support of up to double their salary. However, these are expensive as they are not secured and have high interest rates.
non-bank institutions
Some parents also get personal loans from non-bank finance companies like Dunia and Gulf Finance.
Approaching the University
Parents can contact universities at home and abroad to offer interest-free installment payment plans for unpaid tuition fees. In this case, parents pay monthly higher education expenses, such as tuition or rent.
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