I was recently contacted by my bank to convert my credit card's outstanding balance, charged at 2 per cent per month, to an instalment loan in which I would pay 1 per cent per month. Trying to reconcile what they are charging me, it is clear that 2 per cent was the compounded rate and the 1 per cent quoted was flat, which comes out to 1.7 per cent compounded. The game that banks normally play is to quote a flat rate because it sounds lower. What I never expected to happen is that they would intentionally mix quoting me the flat and the compounded rate. Is that legal? SB, Abu Dhabi
The expert advice:
Ambareen Musa, chief executive of Souqalmal.com, a price comparison website
There is no law that dictates what type of rate a bank should advertise. I cannot comment on whether the bank mixed its quotes intentionally, but it is our responsibility as consumers to be aware of the different types of rates and to ensure they are properly disclosed.
It can be easy to rack up credit card debt without realising. One solution banks offer is to convert outstanding credit card debt into an instalment loan for a specified period. In such situations, the interest or profit rate offered varies depending on factors such as the tenure of repayment and whether the rate is reducing or flat.
Make sure the deal you are getting is better than paying off your current credit card debt. Ask yourself what the catch is. While repayments of the instalment loan may be lower and more manageable, your new loan can extend your current debt over a longer period and you will end up paying more interest in payments.
The UAE has also taken measures to protect consumers from misleading advertisements. In 2013, the UAE Banks Federation came up with a code of conduct for lenders. Now a committee is being set up to monitor the advertisements of member banks and increase transparency. The intention is to safeguard customers from misleading advertisements on banking product rates and fees.
But you must still do your research. Find out if the flat or reducing rate is the most cost-effective option and question the bank about their method of calculation. While some banks advertise flat rates, which calculate the interest on the entire loan without factoring in what has been paid off, others use reducing rates, calculating the interest on the loan’s outstanding balance every year.
Also read the fine print on applications, and check what other banks are offering by comparing both the flat and reducing rates for loans in the UAE.
Finally, account for additional bank charges such as arrangement and early settlement fees. The total cost of the loan can end up being more than just paying off your credit card.
The reader’s advice:
Ahmed Khan, Dubai
Legally, banks are probably on the right side in the way they state interest rates because you will always find an explanation stating whether a rate is expressed as reducing or flat in the small print. While it is probably a legal grey area, ethically it is clearly wrong, as most bank salespeople do not spell these things out fully during consultations unless you specifically ask.
Hidden fees and dishonest advertising are a problem for banks globally, but because regulation in the UAE is still not as strong as in the developed world, it is important that consumers question everything. It is extremely unwise accumulating debt on a credit card, as the compounding nature of this type of loan can mean you end up paying more than 40 per cent interest a year. Far more sensible, if you really need it, is a personal loan, as rates are at record lows.
Next Money Clinic:
My Abu Dhabi water/electricity bills have been up by 40 per cent since January 1. How can I cut costs elsewhere to make room for the increase in my bills? For example, I have cut back on my Etisalat package to bridge the difference. Are there other ways to cut my regular monthly payments? PL, Abu Dhabi
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The advice provided in our columns does not constitute legal advice and is provided for information only. Readers are encouraged to seek appropriate independent legal advice