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Sun 16 Dec 2007 04:00 AM

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Drowning in debt

Debt is a fact of life for tens of thousands of expatriates living in the UAE. The lifestyle makes it virtually impossible to start up a life in the Emirates without borrowing money from the bank - be it through a credit card or a loan. Diana Milne analyses the repercussions and the possible solutions.

Landlords often require up to a year's rent in advance in postdated cheques and arriving in the country as an expatriate means setting up a new life from scratch - buying a new car, furnishing your home, paying school fees along with the many other unexpected expenses.

The lack of an official credit bureau in Dubai means it is very easy to successfully apply for loans or credit cards - regardless of your previous financial history and how many financial commitments you already have.

That, combined with the rising cost of living in Dubai and the financial demands put on expatriates, means that it is easy for these debts to spiral out of control.

Nine times out of 10, once you start missing payments, the bank’s collections agency will hound you, threaten you and generally make life miserable for you until you pay up.

In this guide we explain how to manage your financial commitments so that you don't end up drowning in debt - and what to do if your find yourself going under.

Getting into debt on your credit card can have very serious consequences as the majority of banks will require customers to sign security cheques to the value of the full credit limit when signing up for a credit card.

If the customer misses a payment the bank has the right to cash the cheque - which then bounces - a serious criminal offence in Dubai which could land you in jail, as financial advisor Sandi Saksena of Nexus warns.

"Nine times out of 10, once you start missing payments, the bank's collections agency will hound you, threaten you and generally make life miserable for you until you pay up. And then if you still don't pay then the bank cashes your security cheque and you could end up in jail - it's that simple."

The type of credit card you pick will reduce your chances of falling behind on your credit card payments.

Cards with low interest rates, charges and a high number of interest-free credit days are obviously less likely to land you in serious debt, as Craig Holding, financial advisor with Acuma Wealth Management explains: "There are some important differences between the cards on offer and this can make the difference between whether you land up in serious debt or not.

"You can get into problems for instance if you have a card that offers 30 days worth of credit card rather than 55. It may not sound like a big difference but over time it really adds up.

"Low interest rates and annual fees are also important factors to look out for. These factors are far more important than what free gift or reward points the bank is offering."
Zeeshan Saleem, head of Barclays Middle East's cards business adds: "Understand what your needs are when picking a credit card.

"If you are likely to be somebody who will miss payments don't take a card with high late payment penalties and if you are someone who revolves payments avoid a high interest card."

A credit card is not an alternative to a personal loan and should never be treated as such, or you are at the risk of paying higher interest rates.

However, experts agree that it is not what card you pick but how you use it that will determine whether you will get into serious debt, as Owen Belman, head of consumer banking at Standard Chartered Bank explains: "The card itself is not going to be what's going to land you in debt - it's about how the customer uses the card and their understanding of their repayment capacity versus the purchases they make."

According to experts, one of the best ways to avoid losing all control of your credit card repayments is not to get into the habit of only ever paying the minimum amount required by the bank at the end of the month, as the interest that accumulates can eventually send your debt spiraling out of control.

Saksena says: "You must always ensure that you pay over the minimum balance required by the credit card company. Customers think that if they just pay off the minimum they can sit easy and they won't be hounded not paying the full amount. But if you continue to do that your debt will just continue to mount up and the interest is compounded every month."

Holding of Acuma adds: "It's important to be disciplined and not to get into the habit of just paying off the minimum balance each month. While that may be very tempting and could seem like an easy solution, the interest that builds up over the course of customers doing this could leave them with far higher debts than they started out with."

Experts also urge customers to be very selective of what they actually use their credit cards for - emphasising that they should be used primarily for convenience, rather than for making large expensive purchases.

They say it makes far more financial sense to use a loan to pay for more expensive items as the interest on a loan tends to be cheaper and the payments are debited from your account every month so the debt is likely to be paid off quicker.

Saleem says: "A credit card should be treated as an alternative to cash and should be used for convenience as a short to medium term payment method.

"It is not an alternative to personal or auto loans and should never be treated as such, or you are at the risk of paying higher interest rates."

Holding adds: "For more expensive purchases it is always better to use a personal loan. If for instance you had US$10,900 worth of credit card debt - you might be paying US$1100 a month in minimum payments. Whereas on the other hand if you had a loan for US$10,900 you would be having minimum payments of around US$1650 coming out of your account so you would actuallty be making far better in-roads into paying off the whole debt."
Taking multiple credit cards - while tempting - can lead customers into serious financial difficulties. The relative ease with which customers can apply for multiple credit cards and the flurry of incentives and rewards being offered by banks to new credit card customers all combine to create a situation where many people find themselves with a wallet full of cards from different banks.

Financial experts strongly advise customers against having more than two cards at any one time - and particularly urge customers not to adopt the practice of shifting their balances from one card to another - and even worse taking new cards to pay off existing credit card debts.

"If you take multiple credit cards you end up with multiple debts and you can really get yourself into trouble that way," says Raghuveer Mehra, head of credit at RAKBANK.

"In theory you should have no more than two credit cards at a time. And be very careful of getting into a situation where you have multiple cards and start revolving the balance from one to another," he goes to say.

A lot of customers can get out of debt if they are strict with themselves by taking a personal loan, and by scheduling payments that they can manage.

If you do find yourself drowning in credit card debt - fear not. According to financial experts, there are various courses of action you can take.

First of all, they say, the most important step is to contact your bank to explain the situation and try to work out a solution.

According to Mehra, most banks will be willing to lend a sympathetic ear to a customer and to work with them on putting together a manageable payment plan.

"We have seen many situations in this market where customers have got into serious financial distress," he says. "But all that could have been avoided if the customers had come to the bank in the first place and sought its advice. We always take an understanding approach to our customers' financial situation and try to accommodate that customer's requirements. The key thing is that the customer comes to us as soon as possible to resolve the situation. The worst thing is if the customer does not contact us at all."

Holding adds: "If you do get into problems of credit card debt and you can't make the repayments always contact the lenders and say ‘I can't make this payment, can we for example come to some kind of arrangement so I can make up some extra next month'."

When finding ways to tackle spiraling credit card debt, two recommended approaches you could take are: transferring the balance of the card to another credit card with a lower rate of interest and taking a personal loan to pay off the debt.
The latter approach works because personal loans tend to have a lower rate of interest. Some banks may also be willing to let you consolidate your credit card debt with your existing loan debt and to pay off each in one lump payment each month.

Mehra says: "If all else fails one possible recourse for credit card customers is that they can take a personal loan and use it to pay off the high interest credit card debt then pay off the personal loan in a period of time that is more in synch with the customer's ability to repay. A lot of customers can get out of debt if they are strict with themselves by taking a personal loan and by scheduling payments that they can manage."

Belman goes on to explain how it may be possible to consolidate your existing loan and credit card debts.

"Look across the various loans and credit cards that you have and try to develop a consolidated view of it. Then come up with a plan on how to repay the principle month by month to get it down to a manageable level. If a customer has become over-leveraged and they can't reduce the principle a discussion with the creditors along these lines makes sense."

The key thing is that the customer comes to us as soon as possible to resolve the situation. The worst thing is if the customer does not contact us at all.

Transferring your credit card balance onto another card with a lower rate of interest is another option. But Mehra says, it is essential that customers then discontinue using the original card completely. "If you have a credit card where you are paying 3% and you can transfer that to a card where you're paying just 1.5% then obviously it makes a lot of sense to do that.

"But the key is to close that other credit card down. Because otherwise the temptation is to starting using the card again once it has a zero balance."

Personal loans: boon or bane?

Taking a personal or an auto loan is a necessarily financial evil for most expatriates starting a new life in Dubai.

And while loans can - if you pick the right one - be a lifeline or you don't keep up with your repayments the consequences can be crippling financially.

Like credit cards, banks require customers to sign security cheques when applying for a loan, as Mehra explains.

"We require from loan customers a security cheque to the value of the capital and interest of the loan. We have the right to present that cheque if payments are not being made and if that cheque bounces we have legal recourse to pursue that customer involving the police."

Given the consequences of missing loan payments it is vital therefore to pick one with manageable monthly payments.

Experts advise that from the outset customers should only take loans for specific financial purposes and never to tide them over in times of financial difficulties.

Because if they are taking a loan to make ends meet, it is likely that they will struggle with the monthly repayments required.

"Taking a loan facility should have a purpose - and the intent of the loan is very important," says Mehra. "If your monthly expenses are more than your income and you're taking a loan to bridge that gap then you will have great difficulty paying off that loan in the future."
Saksena adds: "A loan should never be a temporary way of skirting around the issue of living within your means."

Before taking a loan, always ensure that you know exactly what the monthly repayments on that loan will be - and work out whether these monthly repayments fit within your current budget.

"Find out what the repayments will be on the loan amount and the interest depending on the term of the loan," says Mehra.

"Then put that into your current schedule of outgoings so you can see what your total outgoings will be and what you will have left afterwards," he adds.

Saksena explains: "Work out your budget and account for that amount of money going out every month. Only take out the loan if you can surely manage the monthly repayments."

In most cases of cheques bouncing, it has happened because the person has just miscalculated their account funds.

In the UAE, the maximum the bank will lend is around US$68,000 and the term over which this must be paid back varies from 12 months to around 72 months.

Generally the longer you take a loan for, the more you will end up paying back in interest so it is advisable to take the loan for as short a period as possible.

"You may have smaller monthly repayments if you take a loan over a longer period but in the long term you will be paying a lot more because of the interest," says Saksena.

The interest on a personal loan obviously makes a big difference to the size of your monthly repayments.

In the UAE loan interest rates are often quoted as a flat rate rather than a declining or reducing balance rate basis.

Experts warn that flat rates of interest will often be a lower figure than a reducing balance rate but that it is not a true reflection of the interest you will pay as it does not take account of reductions in the loan balance which take place as repayments are made.

It is important therefore to ask what in reality the monthly payments will be and not to be fooled by deceptively low sounding flat interest rates.

If you find you are struggling with your monthly repayments then, as with credit cards, experts strongly advise customers to contact their bank to discuss the situation and if possible how to adjust the repayment schedule.

"If a customer is struggling with their loan repayments they should come straight to us and we will then work with them to find a solution," says Mehra.

"If it's a short term problem we could look at perhaps waiving or deferring a payment. Or we could look at rescheduling the loan and extending the tenure to give the customer a payment holiday."

Common sense advice for money management

Financial experts have plenty of common sense advice on how to avoid getting into debt in the first place.

But, they say, the key to successful money management is to be honest with yourself about your own financial capacity and your spending habits before taking on any additional financial commitments such as loans or credit cards.

Owen Belman, head of consumer banking at Standard Chartered Bank, says: "Number one is to understand what is your financial capacity. Be honest with yourself and be disciplined when making purchasing decisions."

Raghuveer Mehra, head of credit at RAKBANK advises customers to adopt a similar approach to that used by banks to assess customer's loan applications when it comes to looking at organising their finances.

"When customers apply to us for a loan we ask them for a breakdown of their main incomings and outgoings.

"And I would certainly advise customers to take a similar approach when organising their finances.

"The best thing for them to do is to draw up a simple spread sheet then put all their income on one side and their outgoings on the other."

"You need to work out whether you have sufficient income to meet your outgoings and with that you need to be truly honest.

"One other way to do this is to record your daily expenses - record it all month by month then you have a very accurate record of what you're spending."

Sandi Saksena, a financial advisor with Nexus, says simply that always ensuring that you spend less than you earn is the best way to avoid drowning in debt - admitting that it is often hard to do this in a place like Dubai.

"It's very easy to get into debt in Dubai and even those expatriates who have been here for years are finding it increasingly difficult to cope with the daily expenses such as house rent, petrol and the cost of food going up. You just have to spend less money than you earn. It's that simple.

"If you earn US$2800 a month you should be spending US$2450 - and so on. It's difficult to do that when you have a lot of financial obligations, particularly when you have a family, but often it just means compromising on your lifestyle and that usually means entertainment."

For those struggling to make loan repayment because of high interest rates, many banks in the UAE offer balance transfer programmes under which they will buy out their rivals' loans from customers offering them the chance to repay the remaining balance back at a lower rate of interest or with more manageable monthly installments.

Experts warn however, that customers should read carefully the conditions offered by the new bank and whether the existing bank will charge the customer a fee for transferring the loan as some banks in the UAE charge up to 5% of the remaining balance of the loan as a penalty in this situation.

Paying the rent on time

Like credit card and loan debt, falling back on rent payments could land you in jail. Most landlords in Dubai require postdated cheques to cover the rent for up to a year in advance. And if tenants do not ensure that there is sufficient money in their bank accounts when the rent is due, the cheque will bounce.

Kelly Chambers, operations manager of real estate firm Better Homes, explains: "Landlords collect rent in three cheques - postdated at the beginning then cleared by the bank when the rent is due.

"If the cheque bounces we get automatically notified of this by the bank."

She describes the procedure his company follows if this happens.

"We immediately contact the tenant and we don't allow any time to lapse in this scenario as our main priority is to get that rent. We then send out a written notice giving the tenant five days to make the payment. This can be done with a cheque or the cash or the money can be transferred to the landlord directly," she says.

"If the tenants don't do that then we start legal proceedings. We file a case with the police and the case goes to the Rent Committee."

She goes on to say that like banks, landlords are prepared to listen to a customer's personal circumstances, so the worst thing they can do is simply ignore the situation and not get in touch with the landlord.

"We treat every case individually. If the customer comes to us and says ‘this is my situation' we will speak to them and if it's a sincere case where money is coming in but they are just having a short-term cash flow problem we will do our best.

"A lot of landlords will accommodate the tenant in that situation if its genuine situation."

Chambers advises that customers should always ensure that they have sufficient funds in their account to make sure they don't fall back on rent payments.

"You should always put money aside for rent in advance," she says.

"Often it's just a case of being well aware of when the rent is due to go out.

"In most cases of cheques bouncing it has happened because the person has simply miscalculated their account funds and forgotten that the rent cheque is due to be cashed."

Repayment repercussions

Banks follow set procedures for pursuing customers who fall back on credit card or loan payments.

In both cases, if those actions fail to result in payment by the customer, the bank will take the last resort of cashing the security cheque.

When the cheque bounces it becomes a criminal offence and the case can then be dealt with by the police and then the Criminal court.

Raghuveer Mehra, head of credit at RAKBANK describes three-month procedure taken by the bank if a customer misses a payment.

"There's a standard procedure. We start off with telephone calls. If a customer misses a payment, if he does not approach us it goes into bucket one - the first stage of missed payments.

"This triggers an alert then a bank representative calls them and advises them that a payment is due then an automatic letter goes out and sometimes an SMS.

"If we receive no response a further call is made and we go through a sequential stage over the first three months and finally a personal visit takes place."

He goes on to say that beyond this the bank will cheque the customer's security cheque and the police are informed.

According to UAE law, in the event that a cheque bounces, the holder of the cheque can report the matter to the police who will then arrest the writer of the cheque and given them an opportunity to pay the money back. If the payment is not made then the case is referred to the criminal court where in most cases the perpetrator is sentenced to jail.

According to Mehra, within the UAE, ‘skips', where a customer simply leaves the country without paying off their debts, are common.

"Everybody knows about skips. If that happens we have recourse to a skip agency. We try to strike a deal with the customer to recover the principle amount which is not very easy at times. It's unfortunate fact that the delinquencies in debts result in good customers being penalised."

If a person writes a cheque that bounces and leaves the country then, depending on the amount, the police will pursue that person with the help of Interpol and will in some cases return the person to Dubai for criminal proceedings.

Those who attempt to re-enter the country while still under investigation will be detained by the immigration authorities at the airport.

No skipping on mortgage repayments

If you fall back on your mortgage repayments you face the prospect of losing your home through a foreclosure - or forced sale process, as Owen Belman of Standard Chartered Bank explains.

"A foreclosure process is the standard practise by banks worldwide.

"A foreclosure is where a customer is unable to service their mortgage debt and at that point in time the bank has the contractual right to have the house sold and the proceeds then go towards paying off the principle on that loan.

"Anything beyond that would go towards the customer."

The key to avoiding such a situation is to take a mortgage for which, like any other loan, you can afford the monthly payments.

Generally in Dubai home finance providers will borrow up to 90% of the value of a property and interest rates range from around 7.25% to 9%.

It is usually possible to negotiate lower interest rates by taking a mortgage with a lower loan to value ratio.

Mehra emphasises that customers are generally less likely to fall back on mortgage repayment, the larger the deposit they pay, and consequently the lower the mortgage they take.

"There are situations where mortgage providers offer 100% financing but I would not recommend taking 100% finance.

"The higher the deposit the lower the mortgage repayments will be and the less interest you will pay.

"Banks are in the business of managing risk and the higher the risk level of a customer the more interest they will be charged.

"Those that put down a deposit show a commitment and the ability to save so they are considered lower risk."

When it comes to funding the deposit Mehra strongly recommends customers against taking out a loan for this purpose as this could lead customers into a difficult financial situation.

"We have often seen cases in the industry where customers will take a personal loan to put a deposit down.

"I would strongly urge customers not to do this. Because then you have a long term loan with repayments of X and a shorter term loan with repayments of Y and the repayments on the shorter loan will be much higher.

"The combined repayments would potentially put that customer into financial difficulties and really stretch their financial difficulties."

Credit cards do’s & don’ts

• Do read the small print.

• Do be aware of your monthly ingoings and expenses.

• Do pay off your credit card bills in full every month.

• Do talk to your bank if you can't keep up your loan repayments.

• Do always check what the monthly installments will be before taking a loan.

• Don't spend more than you earn.

• Don't own more than two credit cards.

• Don't take a loan for daily expenses.

• Don't use a loan to pay for a deposit on a home.

• Don't use a credit card to pay for expensive items such as a car.

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