Stated below is some relevant information should you want to apply for your next loan
EmiratesEMI (equated monthly installment)
An equated monthly installment (EMI) is defined as “A fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.”
DBR (Debt Burden Ratio) / DSR (Debt service ratio) / IIR (Income to installment ratio)
DBR is used to measures an individual’s 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 EMI’s and 5% of the total credit limit of all credit cards held. DBR is capped at 50% by the Central Bank of the UAE.
AECB (Al Etihad Credit Bureau)
Credit bureau is an agency that collects and maintains individual credit information from banks & financial organizations and provides it to lenders, and consumers in the form of a credit report. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan. A Credit Report will include record of current and previous credit facilities, Payment history over the last 24 months, Payments overdue, Records of any defaults etc.
Risk Based Pricing
Risk-based pricing is a form of price discrimination based on the different expected risks of different borrowers. The interest rates offered customers would be based on previous banking history of facilities availed. Customers with a good banking history will be offered preferential rates as compared to customers who may have defaulted on repayments.
Flat Rate vs. Reducing Rate
Flat interest rate is an interest rate calculated on the full original loan amount for the whole term without taking into consideration that periodic payments reduce the amount loaned. In other words, interest is charged on the full amount of the loan throughout its loan tenure.
Under reducing interest Rate, interest is calculated every month on the outstanding loan balance. EMI payment every month contains interest payable for the outstanding loan amount for the month plus principal repayment. On every EMI payment, outstanding loan amount reduces by the amount of principal repayment. Thus interest for next month is calculated only on the outstanding loan amount as reduced by the principal repayment this month.
Converting flat rate to reducing rate
Some Banks use flat rates when promoting loans as it appears much cheaper when quoted flat but in reality it may be more expensive than a bank that promotes loans on a reducing rate. To convert a flat interest rate to a reducing interest rate, you will have to 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 is a temporary arrangement which allows you to postpone your EMI payments by one month. A fee of AED 100 will be charged for availing this facility. 2 loan installment deferments are allowed every Loan year.
CLI (Credit Life Insurance)
Credit Insurance is insurance that you purchase when you take out a loan that protects both you and the lender in the event that you are unable to pay the loan due to death. This is generally a onetime fee that is paid on the loan amount availed.
ESF (Early Settlement Fee)
Early Settlement Fee is a fee charged by a lender 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
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
Loan against fixed deposit customers can avail a loan against fixed deposits held with the bank. The advantage of taking a loan against fixed deposits is that interest rates on these are usually lower than conventional personal loans since they are secured by the underlying deposit. Loan against deposit may be granted up to 90% of the value of the fixed deposits with the bank. The loan can be taken for any term as long as it does not exceed the deposit's tenure.
Overdraft Against Fixed Deposit
Overdraft against fixed deposit is a quick and efficient way to meet short term commitments. Interest will be charged on the amount and period of utilizing the overdraft.
Amortization Schedule
An Amortization Schedule is a schedule of payments showing the amount of principal and the amount of interest that comprise of each EMI so that 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 (STCL)
STCL caters to small and mid-size expenditures which can be converted to 12 EMI’s so as to ease the burden of one-time payment. Expenses such as school fees, house rent, travel expenses etc. can be paid by availing a short term cash loan. This loan is offered at lower interest rates and may be repaid in up to 12 installments. It is more beneficial than availing cash facilities from credit cards.
Basic Documentation
- Proof of identity – Passport, Visa, Emirates ID etc.
- Latest salary certificate stating present salary, length of service and end of service benefits
- Letter from current employer confirming salary transfer and benefits
- Three most recent months bank statement if the current account is held in another bank.
We hope you find this information useful. We will continue to bring you more tips on borrowing wisely.
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