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Dealing with debt

Caught in the debt trap? Don’t worry, you’re not alone. We consulted the experts to help you manage your finances and put together an action plan…

dirhamsDebt is easy to get in to and hard to get out of. It can help tide you over during difficult times, especially with the rising cost of living in the UAE. But left unchecked you can sink further. But there is a way out: it will take discipline but the good news is you can be free of financial worries if armed with the proper tools.

Financial Facts

A recent poll by finance comparison website compareit4me.com suggested that  25 percent of people were falling behind on debt payments.

At least 5.8 percent have defaulted on their loans, while nearly 20 percent say they have missed payments or made late payments at least once in the previous 12 months.

It’s not just their bank accounts that are taking a hit. “The online survey is quite concerning as more than one in four of those polled also described their monthly debt repayments as ‘stressful’,” says Jon Richards, CEO of compareit4me.

The survey also reflects the steady uptrend in consumer lending as UAE banks continue their recovery from the 2008 recession. Figures seem to show debt amongst expats in the UAE is on the increase (see the Debt by Numbers box).

Looking back at the financial slump, financial adviser and author Theda Muller says: “Most debtors were not directly affected by the financial crisis because they did not invest in the real estate market.

“They remained salaried individuals but they exceeded their income and adopted bad spending habits.”

Matthew Footner, vice president of Globaleye – a company that offers financial planning solutions – says the country’s tax-free environment and easy access to credit instruments prompt many to spend indiscriminately.

He says, “They enjoy the lifestyle and want everything in an instant – a 4×4 car, the hottest gadgets –  so they don’t save any money.

“In fact, they’re borrowing money using credit cards or taking loans.”

The Snowball effect

There are many dangers of ignoring debt as Theda Muller explains: “You create a negative space for yourself where you become unproductive in your workplace and irritable at home.

“You create a ball of fear around you which results in you not taking the creditor’s calls and if they cannot get hold of you, they will proceed with the legal route.

“When your debt snowballs into a legal situation, it will be harder for you to solve the problem unless you have cash in your hand to meet the creditor’s requirements.

“By not taking ownership or responsibility of your debt situation, you lose the opportunity to take control of your life and you remain oblivious to just how much you really owe.”

Matthew says the first step is to get in touch with the bank and discuss the problem to reach a mutual agreement.

“Banks can be sympathetic,” he says. “Before, if you lost your job they would have required you to pay back straightaway. But there are instances now when they give a customer at least three months’ grace period.
They may still impose penalties but they set conditions that allow you to catch up once you’re capable of paying again.”

So how do you melt the debt snowball? Jon says: “Refinancing debts is the first thing people should look into as banks compete with each other and rates inevitably come down.

“Look at consolidating debts wherever possible, such as credit cards, which have a much higher interest rate than a personal loan. This alone could save you thousands, particularly if you only make the minimum payment each month.”

Debt by numbers

  • AED 828 million – average amount lenders pay per week in personal loans, according to UAE Central Bank.
  • AED 17.4 billion – has been borrowed by residents so far this year.
  • AED 317.2 billion – value of personal loans taken out by residents from local banks, accounting for 22.1% of a bank’s credit portfolio.
  • 77% – of surveyed expats revealed that they have some form of debt with UAE banks – 1/2 of these are from credit cards

Take action

Financial advisor Theda Muller gives her best advice on wiping the slate clean.

Make a checklist 

  • Assess your debt by asking yourself:
  • What is my principle
  • debt amount?
  • What is my balance?
  • What is my total amount paid to date?
  • What is my total number of months in default?
  • What late fees and over-limit fees am I subj ect to?
  • Are there any penalties?
  • When was my last payment?

Set a budget


When you have this information you can calculate a monthly budget to repay for each account and a schedule to pay down the debt.

Relax

Create a space in your home where you will not be disturbed and do 20 minutes of deep breathing exercises each morning. This will help to release all the tension you built up over the months or years. This will prepare you mentally to face your debt.

Develop a relationship with your creditor

Arrange to meet with your creditor and make a file for each account with all details so you know what to discuss. Make notes in the meeting, take the business card of the person you are meeting and ensure they are in the correct department.

Be responsible

Don’t be overbearing; be diplomatic by showing you have taken ownership and, above all, be humble because being aggressive or transposing blame for your situation will result in a negative outcome or being shown the door.

Be committed

If you agree on a commitment, like meeting your creditor, then keep it. If you can’t, call to explain why.

Stick to your plan

Maintain your monthly payments. If you ever get a windfall, such as a bonus, try to repay at least one account by approaching the creditor for a reasonable settlement. If you can pay extra on any account each month, then do that – don’t go and blow the money.

Save, save, save…

Matthew Footner of GlobalEye says, “It’s just common sense. Most of us are here to earn and make the most of the tax-free income so that we have saved money when we return home. It’s a rule of thumb to save at least 20 percent of your income. Even if you spend most of it, at least allot that certain percentage for your savings.”

A helping hand

Paul Callaghan, associate wealth consultant at Professional Investment Consultants, adds his top tips:

1. Consolidate all your debts into a personal loan to cut down on interest rates and make your monthly payments easier.

2. Pay off debts with high interest rates first.

3. Stop accumulating new debts. Get advice on your spending habits and spend within your earnings.

4. When you get out of debt, use your money to earn you money. But ensure you have an emergency fund in place.

5. Ensure your savings plan is flexible. Make a plan that is tailor-made to help you achieve your objectives. The key is to save a little over a long period, and don’t take excessive risks with your money.

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