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The UAE can be a very expensive place to live in. Research by Swiss multinational investment bank UBS ranked Dubai as the 3rd most expensive city for expat families. Despite the UAE being known as a tax-free playground for the rich, the reality for many couldn’t be further from that depiction, with a large number of families burdened with ongoing debt from loans.
In many cases taking a loan from a bank can be essential for families with ongoing expenses such as mortgages or school fees. However, for many, what can initially represent a short-term solution to a financial problem, can quickly turn into a major financial headache. This blog will list the things you need to be aware of before signing on the dotted line to take out a personal loan.
The purpose of this blog is not to advise on whether or not you should take a loan, but rather the things you should be aware of if you decide to take out a loan. If you wish to construct a personal financial plan with an advisor, please request a consultation.
The loans market is big business in the UAE, different lenders will offer different amounts for different rates of interest, make sure you compare the market to ensure you are getting the best rate of interest. It is often advisable to speak with a financial advisor rather than a representative of a bank as you may receive a biased opinion.
2. Know your credit history
Your credit history is very important when it comes to taking out a loan. If you have a poor credit history due to missing repayment dates on loans you have taken in the past, it is possible you will be penalised for this resulting in a higher rate of interest or less favourable repayment dates. If this is the first time you are taking out a loan, then your credit score will be calculated by your income, age and background.
3. Look at the other options
Depending on your personal financial circumstances you may have other options available to you as opposed to taking a personal loan from a bank. Depending on your age, income and other characteristics, you may be eligible certain credit cards which could help meet your needs. Many cards allow you to borrow credit at 0% interest for up to 12 months. Depending on the size of credit you require, this may be a more suitable and significantly cheaper option. Once again, there are numerous things to be aware of with a credit card.
4. Borrow what is required
In many cases, banks will be able to offer you significantly more in credit than what you actually require. The higher the amount of credit, the higher the amount the bank can charge you to borrow. As such, it is important for your financial health, that you only borrow the exact amount which is required. A loan should not be used for non-essential purchases. As Warren Buffett said ‘if you buy things you do not need, you will soon have to sell things you do’. Banks market loans to make them seem as attractive as possible, be wary of what you are committing to, and do not overcommit yourself unnecessarily.
5. Read the small print
Do not let yourself fall into an avoidable trap whereby you sign something you do not allow the time to fully understand. When you take out a loan you must be fully aware of every clause within the contract. You should also allow yourself ample space for your repayments, plan this carefully. Unexpected costs are common in life and if you do not leave yourself sufficient breathing room with your loan, you may miss a repayment leading to penalty and further financial difficulty.
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