The Debt Panel: 'I missed a loan payment and my security cheque bounced'

The Dubai resident has had difficulties paying the Dh25,000 debt and has missed instalments in the past

Interest rates on loans from some finance companies are much higher than you would find with the majority of commercial banks. Steven Castelluccia / The National

In 2018, I took out a Dh25,000 personal loan with a finance company. At the time, I was having financial difficulties and it was the easiest way to get a loan rather than applying to a bank.

It is a four-year loan that matures on June 1, 2022, and the monthly instalments are Dh1,217.

Paying the loan is becoming more difficult for me and I have missed a couple of payments in the past. I was able to pay my instalment last month, but this month I missed it. Since then, I received a message that a Dh35,000 cheque had been presented on my behalf to the account and it bounced.

When I contacted the finance company to ask how much the outstanding amount on the loan was, they said it was Dh26,000 – this is despite paying the loan for nearly 3.5 years and only borrowing Dh25,000 in the first place.

How can they present a cheque higher than the amount owing? I have only defaulted on my payment once recently and thought you have to miss three consecutive payments before something like this can happen. They are also offering me a settlement amount of Dh15,000. If I can pay it in full, they said they will close the loan for me.

I don’t have the money to pay Dh15,000 to close the loan. Can you advise me on what I should do? KC, Dubai

Debt panellist 1: R Sivaram, executive vice president and head of retail banking products at Emirates NBD

It is unfortunate that you have been having financial difficulties leading to irregular monthly repayments, resulting in the finance company deciding to call in the debt.

As a first step, ask the company to provide you with a detailed statement of your loan payments, as well as a breakdown of the current outstanding amount owed that has been broken up by principal loan amount, accrued interest and accumulated charges.

Any delayed payments would have attracted interest and possibly some penalties as well, which will be added to the outstanding amount.

Based on the above, you should have a discussion with the concerned finance company officer and detail the difficulties you have been facing and confirm your intent to pay the outstanding amount and close the debt as soon as possible.

It is worth asking if you can pay the settlement amount over a few instalments to give you time to arrange the funds. You can also explore options of selling any assets that you may have, either here or back home to see if you can raise additional cash, or if you can obtain some assistance from family and friends.

You should then provide the finance company with a proposed plan to pay off the settlement amount that is being offered.

I wish you the best of luck with putting together and agreeing on a mutually acceptable plan. Hopefully, you will be able to close this matter in the coming months.

Debt panellist 2: Nathan McFarlane, founder of AskHelpWith.com

As you have probably now realised, interest rates on loans from some finance companies are much higher than you would find with the majority of commercial banks.

It is likely the interest rate you have is more like a credit card than a loan, which means that you end up having to pay back a lot more than a typical loan.

Often, debt collection teams for finance companies will send text messages, emails or even WhatsApp messages to the customer stating they are bouncing a security cheque if you have missed one or two loan payments.

As always, it is highly recommended that you keep in touch with the finance company to avoid any unnecessary problems.

If you are worried about a bounced cheque, you can check the Dubai Police website under "Criminal Status of Financial Cases".

This service allows members of the public to inquire about financial cases that may have been registered against them in Dubai and also includes information on whether or not there is a travel ban against you. It is a free service and you will need your Emirates ID to register your request.

Banks and financial institutions will often try to settle debts in one-shot payments. This is an ideal situation for them because they believe you will not complete the term of your loan as you are already in the process of defaulting.

I would go back to the financial institution and negotiate terms that work for your particular situation. It might well be that you cannot pay for many months due to your financial difficulties.

However, it is important for you to be honest, transparent and continue to show your good intentions to pay back your debt – and a solution will come in time.

Debt panellist 3: Jaya Ratnani, managing partner at Freed Financial Services

Your situation is indeed very unfortunate. You have done well by honouring most of your monthly commitments. I understand that it can be frustrating to know that despite paying so much, the amount due is still close to the original borrowed amount.

Sadly, that’s how the economics of a reducing balance loan work. The majority of your payments, especially those during the early part of the loan, have gone towards interest.

Also, if you have missed a few payments, each missed payment comes with high penalty charges.

If there are any deferments or payment holidays, additional interest-on-interest, known as compounding interest, can accumulate quickly. Due to the above, the loan amount has not come down substantially.

The security cheque provided at the start of the loan includes the original borrowed sum plus future interest. In case of a default, the bank will use the security cheque to file legal action.

However, at the time of settlement, the bank can recover only the amount that is owed to them as per the current outstanding, which in your case is Dh26,000.

Usually, a security cheque is presented upon the default of three consecutive payments. However, a bank or finance company can initiate action at an earlier stage if they feel the risk of default is high.

Poor past repayment history, lack of communication with the bank and current job status are some factors that may raise the alarm for lenders.

If the finance company has offered a settlement of Dh15,000, you should close it by borrowing the funds if possible. The finance company has offered a good discount and settling the loan will help you to prevent more interest getting piled on to it.

Alternatively, you can meet the financial institution and explain your current situation with a view to restructuring the monthly instalments to a lower amount by reducing the interest rate and extending the tenure.

The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to [e-mail]