I am the breadwinner in my five-member family and earn a monthly salary of Dh18,000 as a chef in a hotel. I have never taken my family on holiday except to my home country of Sri Lanka.
Following the Covid-19 movement restrictions last year, we wanted a break and decided to finally take a holiday. However, I didn’t want to use our savings to pay for it, so took out a personal loan of Dh30,000. I used all the money to book the flight tickets and pay for the holiday to Paris.
However, my salary has since been reduced by 20 per cent after the pandemic and I am now struggling to meet the loan repayments, school fees for three children, credit card debt and other living expenses.
My loan instalment each month amounts to Dh4,000, I have credit card dues worth Dh12,000 and other expenses worth about Dh11,000 every month. I also need to remit money to my parents every month since they are dependent on me. I am struggling to make ends meet and tapping into my savings is my last resort.
With the uncertainty we endured last year, I want to have the cushion of an emergency fund in case things go wrong. What are my options to get out of this debt spiral? LM, Sharjah
Debt panellist 1: Steve Cronin, founder of DeadSimpleSaving.com
I understand that keeping your family happy and creating amazing memories together is important, especially after the lockdown. I hope you all had a great time in Paris.
With travelling, you can enjoy planning, experiencing and remembering, so it usually provides good value for money, especially if you can control your budget.
I also understand that you didn’t want to eat into your savings, which will provide for your future. Unfortunately, that is now what you are likely to have to do.
Going into debt is not the right way to pay for a holiday. A loan is best made against an asset that at least holds its value. Properties are OK, with the risk that the value could fall, and a second-hand car's value go down more slowly than a new car.
Borrowing for a holiday requires a personal loan or a credit card and both of these are dangerous if your salary drops. In addition, you seem to have borrowed for the holiday while already having credit card payments and expenses of more than Dh23,000, plus whatever you send your parents.
Given your salary was Dh18,000, you couldn’t afford the loan even before your salary was cut. What you should have done was to create a sinking fund for your holiday and invest Dh1,000 to Dh2,000 every month until you had enough saved up for a debt-free holiday. This requires advanced planning and discipline.
It is not clear whether you have a credit card balance that you roll over each month or you pay it off in full. If you are rolling the balance over, you should look at a consolidation loan that will merge your credit card and personal loan debts at a lower overall interest rate.
Assuming the interest rate on your personal loan is above a 5 per cent reducing rate, you should probably use your savings to pay it off. This will free up part of your salary to cover your other expenses and eventually start saving again. Your main problem is not one of juggling interest rates between your debt and your savings or investments. Your problem is cash flow.
You cannot sustain spending more each month than you earn. You need to boost your income and rapidly reduce your expenses. Can you keep an eye out for other jobs? Can you earn additional money? Does your wife work?
You must reduce your expenses below your income, even if that means making tough decisions about what to cut. Look at the large items and the small items that add up over the month.
Go through your card statements and receipts to identify expenditures that are not essential. Get your whole family in on this for ideas – it will be a useful lesson for them and there is no shame. They enjoyed a nice holiday and now it’s time to tighten the belt.
Once you are able to save some money each month, you will be able to replenish your cash savings and eventually start investing for the future.
Debt panellist 2: Philip King, head of retail banking at Abu Dhabi Islamic Bank
Your instinct to build an emergency fund is the right one. We should all save at least three months’ salary just in case the worst happens.
However, given your recently reduced salary and increased level of debt, you are unlikely to be able to afford to build up an emergency fund right now. However, you mentioned that you chose to fund your family holiday with new debt rather than with your savings.
I would strongly advise that you meet your bank. They might suggest consolidating your debts into one loan so you will be better off in the long run if you pay down the debt and credit cards in instalments.
If you have enough in your savings to do this, it will ease your monthly spending pressures, alleviate what is no doubt a tremendous level of personal anxiety and provide fiscal breathing space to slowly start building your savings again.
If your savings do not cover the Dh30,000, then you must speak to your bank manager as soon as possible to discuss your situation.
Your bank might respond sympathetically to these circumstances and could help you to either refinance your borrowing or agree to a lower monthly repayment rate. If you refinance, make sure that the monthly payments are affordable. Speak to them openly and you will most likely be able to reach a mutually agreeable solution.
I would also strongly advise against taking out further credit in the medium term so that you can build up your emergency fund and re-establish a good credit rating.
If and when a crisis occurs, that fund will give you the reassurance you need to see it through and help you to avoid borrowing, which is never a good idea in times of such uncertainty. Good luck with this.
Debt panellist 3: Carol Glynn, founder of Conscious Finance Coaching
It isn’t advisable to take out a personal loan to pay for a holiday. That is now over but you are paying for the loan with interest on top. Use this experience as a lesson to only pay for holidays from savings.
Contact your bank to explain your salary has been reduced and discuss a debt restructuring. If you extend the period of the loan, you will be able to reduce the monthly instalment.
It will cost more in interest in the long run than your current agreement but if you are unable to make payments, it is cheaper as defaulting, paying late payment fees and compounding interest will drive your debt higher. You will also have to consider the negative impact on your credit score.
It is extremely important to pay off your credit card debt as soon as possible. They carry very high interest rates and payment default charges and can snowball quickly.
If you have enough funds in your savings, consider using it to clear your credit card. If not, speak to the bank about a consolidation loan combining your holiday loan and your credit card debt. Then cancel your card so you are not tempted to raise debt again while you are still paying off your personal loan.
It is very sensible to have an emergency fund and well done for having one. Its core purpose is to allow you to cover unexpected expenditures during times of need.
Being unable to service your debt is one of the reasons we recommend people have an emergency fund saved. I would urge you to consider using at least some of this to help you pay off your debts.
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 firstname.lastname@example.org