I have a loan of Dh17,500 and three credit cards: one with an outstanding balance of Dh9,500, another of Dh7,500 and a third of Dh12,500. My total debt is Dh47,000 and my monthly repayments total Dh3,332. I am from Nigeria and earn Dh7,000, working as a safety supervisor in the oil and gas sector, and my wife and six-month-old son live with me. I built up the debt on the credit cards and loans because my company has been irregular in paying my salary and I missed some of the payments. At one point there was a two-month delay in my salary being paid and my employer does not have a specific pay day at the moment. I have been searching and applying for buyout loan to consolidate all these balances together but I have not been having much luck. Owing to some financial obligations back home and accommodation expenses here, I have found it difficult to make the debt payments, which I presume is why my approaches to the bank for a bail out have been rejected. Before my debt becomes outrageous, what can I do? OO, Dubai
Panellist 1: Keren Bobker, an independent financial adviser with Holborn Assets
It is unfair of any company to make salary payments late as this can cause immediate problems for employees. The Wages Protection Scheme is an electronic salary transfer system that was set up to assist with ensuring that employees are paid in a timely manner and in full as per their contracts of employment. If salaries are not being paid then OO can consider registering a case with the Ministry of Human Resources and Emiratisation. This is not the main query but the salary delay is relevant to why OO has a debt problem.
The total loan payments are below the UAE Central Bank Debt Burden Ratio limit of 50 per cent of income but supporting a family of three can be costly. While I understand that a family would rather live together, would it be cheaper in the short term for his wife and son to return to Nigeria while he concentrates on living as cheaply as possible and reducing, and ultimately repaying, the debts? Short-term pain for long-term gain. As things stand, not only is OO finding it hard to maintain the minimum payments, all he is doing is paying interest and not reducing the capital outstanding. Until he pays more than the minimum amounts each month the situation will not improve.
The interest rates on credit cards are higher than for personal loans, so transferring the credit card balances to a loan could be a sensible move but only if he then cuts up the cards and does not build up any further debt. New loan applications are now all subject to a credit check from the Al Etihad Credit Bureau so if payments are in arrears or are made late then this will affect the credit score. In turn, this affects not only the interest rate payable but also whether a bank is willing to lend money at all. I would strongly recommend keeping well away from secondary lenders who offer loans to higher risk applicants as not only are the interest rates higher, they are also less sympathetic and more aggressive if any payments are missed. I can only suggest that OO keeps up payments for a few months to increase his score and then approaches his own bank again to look at rescheduling the existing debts.
Rescheduling debts is not a magic fix to any debt situation and I cannot stress how important it is to reduce outgoings and to reduce debts that represent such a high percentage of income to avoid this becoming a problem that simply repeats every couple of years.
Panellist 2: Ambareen Musa, the founder and chief executive of Souqalmal.com
It seems the problem had become worse because your employer did not pay your salary on time and the delay caused you to miss your payments. But the main problem was to rely on high-cost debt as a substitute for your regular income.
You have an outstanding amount of debt on three credit cards and a loan repayment. Each one has a different interest rate.
It is indeed unfortunate that the best option for you to unify all your debts in one regular monthly installment has been rejected.
But still, you have an option to consolidate most of your monthly repayments. This option is called a balance transfer; it helps you to consolidate your debts on the three credit cards in one card with a lower interest rate. That makes it affordable to pay off.
The balance transfer can be helpful if you choose a zero per cent or low-interest deal with enough time to pay it off, such as a transfer period of six months or more.
You must make sure the credit card provider will not charge a high fee for the balance transfer, that you cancel your credit cards and that you don’t make any new purchases on the new balance transfer card. This will prevent your debt growing any further.
Compare the transfer rates on the credit cards, and use the one with a lower balance transfer rate than the interest you have to pay on all your current cards.
Having said that, consider a downgrade to your current living standards, which might mean sending your wife and child back home, if at all possible. This will save more money that will support you until you get rid of all your debts and receive your salary on time. This might be a good way to reduce your financial stress.
Also, your case shows the importance of having an emergency fund that can cover the financial surprises life throws your way. These unexpected events can be stressful and costly, such as job loss, not receiving salary on time or a medical emergency.
Having money set aside for a rainy day gives you confidence that you can tackle any of life's unexpected events without adding money worries to your list of worries.
Panellist 3: Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life
Unfortunately, not being paid on time is something that's too common in the UAE. It makes monthly budgeting somewhat challenging and cash flow becomes a problem. Unless extra attention is taken to manage the situation you can soon find yourself in debt. Having a back up solution - an emergency fund, is always the key.
A recommended emergency fund should be around three months salary. It should be kept in an instant access account. If you don't have the funds, then the first step is to set aside a monthly amount to build it up.
Another common theme here is the causes of unmanageable debt: the costs of a chosen lifestyle are more than your monthly income. This is becoming a serious problem for many. As the cost of living has been increasing in the UAE and salaries have stayed static, or in some cases decreased, many households are not able to keep up with the lifestyle they have become accustomed to.
At this point you have to seriously start thinking about what to do next.
Either you change your lifestyle, downsize the house, move area or even consider sending your family back home temporarily. You have to find a way to now live within you means. The alternative is to find a way to make more income or the last option is that it's time to go back home. Waiting until you are drowning in debt will only put you in a choice-less corner where court and jail is the outcome.
Consolidating your loans is a good option only if you know that your lifestyle costs are affordable within your salary. If it is not then you will soon find yourself needing another consolidation loan. So first do your numbers.
Approach your banks first, start with the ones you have the debt with. If that fails, try a debt rescheduling company that can help you negotiate with the banks. Make sure you have your numbers with you. Know all your expenses and have a figure in mind of what you can comfortably repay back as a monthly installment. Remember there will be a fee involved in the process.
On this panel this week: Keren Bobker, an independent financial adviser with Holborn Assets; Ambareen Musa, the founder and chief executive of the comparison website Souqalmal.com and Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life. The Debt Panel is a weekly online column to help readers better tackle their debts. If you have a question for the panel, write to firstname.lastname@example.org.