How to escape the UAE debt trap

How to escape the UAE debt trap
08 March 2012

HORROR stories of falling into the debt trap in the UAE and wider Gulf have been well-documented since the crash of 2009: businesses unsupported by insolvency protection; individuals with existing loans suddenly left with no job; one-way air tickets and dusty cars abandoned at the airport.

Many who bought homes off-plan late into the housing market boom have found their properties deeply undervalued and, in some cases, still not ready to move into. Many more are lumbered with properties they can’t sell.

Banking on problems

Of course, a big part of the problem was during the boom times banks were happy to lend money to the nearest taker. Even now, despite the formation of Dubai government-backed credit agency, Emcredit, in 2010 many UAE banks still do not subscribe.

“Because banks [in the Emirates] are not interlinked they don’t really know the credit situation of a new applicant in terms of how many cards they have with other banks and the debt they’ve accrued,” says Andy Yiacoumi, business development manager at Decol Debt Collections LLC.

Workable solutions

Faced with a growing debt collection problem, some UAE banks are now looking to find a workable solution for both parties. Measures include helping their customers to consolidate their debts by transferring balances onto fewer credit cards or loans.

From the perception of the many who took their chances on a one-way flight, this sees a departure from UAE banks’ attitudes of the past.

“Certain [UAE] banks are open to negotiation,” says Yiacoumi. “They’re starting to understand the need to be more flexible.

“The key is to be firm with them and to try talk to someone senior who can make a decision at the end of the day.”

When negotiating with banks, try to get them to freeze the interest, suggests Yiacoumi. You need to be completely transparent, and stick to your renegotiated terms. Banks will only listen if you’re serious about solving the issue.

Prudent steps

What else can you do? It makes sense to pay off the most pressing debts, such as mortgage arrear, first.

If you don’t have mortgage arrears, shed the debt that has the highest rate of interest – often your credit cards. Avoid the minimum payment spiral where you only service your interest payments with no chance of reducing your loan.

Another route is to enlist the help of a credit consolidation firm, but beware forking out cash that you don’t have.

Yiacoumi says: “I’ve heard that one or two debt consolidation firms do operate here in the UAE, but as far as I am aware they charge some sort of upfront fee for their services.

“It’s a difficult situation – trying to take money upfront from someone who already has a serious financial issue.”

cashy attempted to contact one such firm, but could not get an answer on the phone and its website was out of service.

Look before you leap

Make sure you don't make the same mistakes in future. Before committing to a loan, consider the ‘what if’ scenario should circumstances change. What difference might it make, for example, if your mortgage interest increased by 3%? That is not unrealistic: some banks in the UAE hiked their rates during the property crash and have not reduced them since.

A general rule of thumb is to keep your debt-to-income ratio to no more than 20%. As far as you are able, live within your means, arm yourself with knowledge and avoid the UAE debt trap.

Pic credit: Grant Cochrane/ FreeDigitalPhotos.net

Have you worked your way out of debt? What's your advice? Or are you struggling with debt? Share your stories...

Comments

  • observer
    observer
    2012-09-14T16:45:10

    People forget credit cards are payment tools (remember a cashless payment method?) and not some magic tool to finance your never ending, must have, dreamy desires.!

    For those die hard shoppers how about carrying cash with you on your next shopping adventure.

  • nima
    nima
    2012-09-15T20:36:34

    So true Observer! And for us all to remember to live within our means, we're launching the UAE Saves Week. More info here: http://www.cashy.me/en/about-uae-saves-week/

    I do hope you'll join us &share your photos

  • ConsumerWatch
    ConsumerWatch
    2013-06-27T16:18:09

    Sad but true comment by @jameelah3sh on Twitter -- "@cashyME lots of credit card victims...they don't know how to manage it...they just wake up when they're already in debt grave :("

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