Responsible borrowing avoids unmanageable debt
At Emirates NBD we take our responsibility to you, our client, very seriously. Through this article, we aim to inform you about how to borrow money safely, so you can benefit from the power of our loans while avoiding unmanageable debt.
Responsible lending and borrowing are good for our clients and for the industry. As a responsible lender, we will never over-stretch you. We will only offer you loans that fit your budget, so you can pay back comfortably. Don’t be tempted by more money from lenders if you can’t afford it, that will only lead to a debt burden that will quickly spiral out of control.
Ask yourself the following questions before you take a loan:
- How much can I afford to borrow?
- Do I trust the bank I’m dealing with?
- Is the interest rate competitive?
- How much will I be paying back every month?
- Are the terms and conditions of the loan clear to me?
- Is the loan insured?
- If I can’t pay back at any time, do I know what options I have?
Arm yourself with all the information you need
Once you answer all the questions above, you need to understand the common concepts and terminology associated with loans. Here, we present the most important ones – read and understand so you can borrow wisely.
Equated monthly installments
An equated monthly installment (EMI) is a fixed payment you will make to the bank on a specified date every month. Your EMIs will include both interest and principal, so the loan will be fully paid off over a specified number of years.
Debt burden ratio
Your debt burden ratio (DBR) measures your ability to manage monthly payment and repay debts. DBR is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage. The total recurring debts will include all EMIs and 5% of the total credit limit of all credit cards held. DBR is capped at 50% by the Central Bank of the UAE.
Learn more about your debt burden ratio and your credit score.
Credit reports
A credit report helps lenders assess your credit-worthiness or your ability to pay back a loan. It can affect the interest rate and other terms of a loan. The report includes a record of current and previous credit, payment history over the last 24 months, payments overdue and records of any defaults.
The Al Etihad Credit Bureau (AECB) in the UAE collects and maintains individual credit information from banks and financial organisations. Any lender can request the AECB for your credit report when you apply for a loan. It’s a good idea for you to request a credit report for your own records, or before you apply for a loan. There is a small charge for this. Learn more here.
Risk-based pricing
Risk-based pricing is a form of price discrimination based on expected risks for different borrowers. The interest rate offered to you is based on your previous banking history. If you have a good banking history, you’ll be offered a preferential rate as compared to customers who may have defaulted on repayments.
Flat rate vs. reducing rate
A flat interest rate is calculated on the full loan amount for the whole term without taking into consideration that payments over time reduce the amount borrowed. In other words, interest is charged on the full amount of the loan throughout the loan tenure.
A reducing interest rate, on the other hand, is calculated every month on the outstanding loan balance. EMI payment every month contains interest payable for the outstanding loan amount plus principal repayment. On every EMI payment, outstanding loan amount reduces by the amount of principal repayment. So interest for the next month is calculated only on the outstanding loan amount.
Converting a flat rate to a reducing rate
Some banks use flat rates when promoting loans as they appear much cheaper, but in reality this may be more expensive than a reducing rate. To convert a flat interest rate to a reducing interest rate, multiply it by 1.8 and in case you wish to go from reducing to flat, then divide the given rate by 1.8%. For example a flat rate of 3.99% is more expensive than a reducing rate of 6.99% (3.99 X 1.8 = 7.18%).
Deferment
A deferment allows you to postpone your EMI payments by one month. A fee of AED 100 applies. You can defer 2 loan installments in one loan year.
Credit Life Insurance
When you take out a loan, you also purchase credit life insurance that protects both you and the bank. This is generally a one-time amount that is paid on the entire loan amount.
Early settlement fee
An early settlement fee is charged by the bank if you pay off a loan or mortgage before the scheduled term of the credit facility. This is usually 1% of the loan outstanding at the time of loan repayment but can vary based on the type of loan.
Overdraft
An overdraft is a loan arrangement under which a bank extends credit up to a maximum amount (called overdraft limit) against which a current account customer can write cheques or make withdrawals. The credit limit is the amount you can withdraw once the current account balance reaches zero. Interest is charged only on the daily overdraft (debit) balance in the account.
Loan against fixed deposit
A loan against your fixed deposit for NRIs at the bank usually has the advantage of a lower interest rate than that on a conventional personal loan since it’s secured by the underlying deposit. You can get up to 90% of the value of your fixed deposit and the loan can be taken for any term as long as it does not exceed the deposit's tenure.
Overdraft against fixed deposit
An overdraft against a fixed deposit is a quick and efficient way to meet short-term commitments. Interest will be charged on the amount and the period for which you use the overdraft.
Amortization schedule
An amortization schedule is a schedule of payments showing the amount of principal and the amount of interest that comprises each EMI until the loan will be paid off at the end of its term. An amortization schedule will also include additional information such as the amount of interest and principal paid as well as the remaining principal balance
Short-term cash loans
Short term cash loans cater to small and mid-size expenditures which can be converted to 12 EMIs so as to ease the burden of one-time payment. Expenses such as school fees, house rent and travel expenses can be paid with a short-term cash loan. This loan is offered at lower interest rates and may be repaid in up to 12 installments. It’s more beneficial than borrowing cash on credit cards.
Topping-up your personal loan
If you need more cash, you can top up your Emirates NBD personal loan at any time.
Choosing a bank you trust
Do your research. Talk to your associates and friends about their experiences with banks. A reputable bank will ensure that you have peace of mind and a pleasant banking experience.
Here are some things to consider:
- Transparency: ask about fees and charges including early settlement and partial settlement fees.
- Interest rate: is it the most competitive rate available?
- Flat rate vs reducing rate: don’t be misled, a low flat rate could actually prove more expensive than a higher reducing rate! Check the point above.
- Systems and processes: choose a bank that has the systems, processes and staff trained to advise you well and manage your personal loan efficiently.
- Access to your bank: try not to be too far away from your branch or ATM. With Emirates NBD, you will have access to a network of over 227 branches and 1,065 ATMs.
Lower EMI vs faster repayment
Low EMIs could lead to longer payment periods. In the long run, this could prove more expensive as you will be paying more interest. Talk to your loan consultant and work out a payment period that suits you best. Don’t stretch the loan for longer than you really need to if you want to save on interest payments and become debt-free earlier.
Be careful not to take hasty decisions as changing anything once you’ve signed up for your loan will always have associated fees. Ask all the questions you need to, there is no hurry!
Ways to ensure easy repayment
- Borrow the amount you need and no more
- Live within your income
- Set achievable financial goals
- Prepare for financial emergencies - always have some money readily available that can help you tide over any crisis
- Develop wise money management habits
Not happy with your loan?
If you’ve changed your plans or you’re not happy with your Emirates NBD personal loan, you have the option to return the loan within 7 days without any charges. Read more here.
The power to borrow wisely is in your hands!
Come to us for any help you need with a loan and we’ll be happy to have one of our loan experts answer your questions and take you through the process.
Apply now >
Questions about our loans? Learn more here.
How much can I borrow on a personal loan?
Most banks will prescribe a limit on your personal loan based on your income and ability to repay. However, it’s always advisable to borrow an amount that you will be able to safely repay without getting into debt you can’t manage.
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