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Factors to consider before taking out a personal loan.

Watch out for hidden charges, eligibility, repayment criteria and profit rates

The festive season may be over but banks are still benefiting from the spending associated with that time of the year. Many of us are planning to take out personal loans to fund our New Year resolutions as 2015 begins.

For our stats at Souqalmal.com, we've noticed a 62 per cent increase in the number of searches on our personal loans page in December, as compared to November. Out of the total, 30 per cent of those searches originated in Dubai and 21 per cent in Sharjah. We also estimate a further increase of 69 per cent in the number of searches this month.

For those looking to borrow, do not settle for the first loan you stumble across -- whether it's from your bank or an advertisement you spotted on the roadside. Instead, consider all the factors associated with personal finance -- from all the fees you will be required to pay, to your ability to repay the loan amount. We have put together a checklist you can follow to ensure you find the right loan.

Do your research

Comparing all the UAE loan options available is key to ensuring that you are up-to-date with any fees, eligibility criteria as well as any hidden charges. First, decide whether you want a loan from an Islamic or a conventional bank. While the rates may be competitive, the way the loan is arranged differs as an Islamic institution needs to ensure its loans are Shariah-compliant. Products vary enormously and can include niche offerings for education, travel or rent. To narrow your search, Souqalmal.com has added filters and tools to help you find the loan that meets your criteria.

Calculate your repayments

Signing up for a loan without factoring in the chunk that will be deducted from your monthly salary is dangerous. Souqalmal.com has a loan calculator on its personal loans page allowing you to accurately work out the monthly repayments for each loan listed on the site. You can then decide a realistic and affordable loan amount to borrow from the bank.

Fees, fees, fees

Research the fees applied to each loan, such as late payment fees or surprise charges such as a processing or arrangement fee. Remember to add these to the principal loan amount when calculating the cost of the loan. Fees to watch out for include:

* Arrangement fees: These can be one to two per cent of the loan amount or a fixed amount -- this will be added to the principal loan.

* Early settlement fees: Usually early settlement fees amount to one per cent of the outstanding balance. However, when it comes to Islamic finance, check whether you are required to pay all the future profits when you close your loan early.

* Late payment fees: Banks may charge a fee for a late monthly payment.

* Insurance: Some banks insist on insurance cover for critical illness or unemployment while others offer it as an option. Check if this is built into your repayment.

Are you eligible?

Loans can come with minimum salary requirement, typically between Dh3,000 to Dh30,000. You may also be required to transfer your salary to the bank and be employed in a company that is in the bank's approved employer list (a pre-determined list that assesses your credit worthiness based on your company's track record). However, these lists of approved companies may soon be redundant with last year's introduction of the Al Etihad Credit Bureau. The bureau supplies banks with credit reports detailing a potential customer's liabilities and negating the need for a bank to ask for endless bank statements, documents and employer information to assess your credit history.

How indebted are you?

According to Central Bank rules, you cannot use more than 50 per cent of your income towards loans and card repayments. Therefore, if you apply for a loan when you already have debt, you may struggle to gain approval. To save time, calculate your existing debt repayments to see whether you are eligible to borrow more.

Compare the right rates

There is no standard method of advertising interest or profit rates in the UAE. Therefore, some banks advertise flat rates and others reducing. But the difference is vital when assessing the cost of a loan. A flat rate -- usually lower than the reducing rate -- calculates the interest on the entire loan amount without considering the amount already paid off. A reducing balance rate calculates the interest on the outstanding balance of your loan, which reduces as you pay off the outstanding balance. Therefore, only compare flat with flat and reducing with reducing -- never mix the two up.

Do you plan to pay the loan off early?

While some banks do not charge early settlement fees, others charge one per cent. However, while conventional banks will deduct the unpaid interest from your final settlement, an Islamic bank may expect you to repay the future profit rate as well. Under Islamic law, personal loans are often issued under a murabaha contract -- a bank buys an asset and the borrower agrees to buy it back at a markup. So, make sure you understand what you need to pay when it comes to fees and profit rates prior to signing the contract.

What's your employment status?

The easiest way to secure a loan is to be employed and working for a company on a bank's approved company list. But the self-employed should not panic. While it's not as easy to secure personal finance, it is not impossible either. The bank may demand more paperwork than an employed customer -- up to three years' worth of audited reports --- and apply a higher interest rate. You can find the options offered, along with eligibility criteria, at Souqalmal.com.

But the strict application process is there for a reason. If you are still in the early stage of your start-up, is it really a good time to take on debt? It is stressful enough managing your business' cash-flow, let alone liabilities closer to home. Ask yourself if the expense of a loan can wait.

Is it time to consolidate?

If you have made a New Year's resolution to save, consolidating all your debts into one loan at a cheaper rate can pay off. Before taking on consolidation finance, note the early settlement fees on each of your outstanding loans to ensure the savings you make on your new loan rate is not offset by the penalty fees.

The writer is the founder and chief executive of Souqalmal.com. Views expressed are her own and do not reflect the newspaper's policy.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:7UNIT
Date:Jan 27, 2015
Words:1117
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