Two years ago, I asked a bank to restructure my credit card, so from Dh25,000, it became Dh36,000 (including the interest). That meant I only had to pay a monthly amount, which had a lower interest rate applied to it. Recently, I approached them to say I would pay off the full balance which at the time was Dh20,093. I also asked if I could just pay the principal amount, deducting the future interest on the loan. They said no, you have to pay this full amount (which includes all the interest). Is this the case for all credit card debts that have been restructured? RR, Dubai
Debt panellist 1: Jamal Alvi, the chief credit officer at Abu Dhabi Islamic Bank
This looks like a case of a credit card’s outstanding balance getting converted into an instalment loan as part of a settlement plan. Based on the information provided, it appears that on a card spend, including possibly some cash advance, of Dh25,000, the total outstanding that was converted into an instalment loan was Dh35,000. This probably included fees and charges accrued on the card balance until that point. As the tenure of the restructure period and the instalment amount is not provided, it is difficult to assess what kind of interest rate the restructured loan carried.
In any case, no banks are allowed to recover any future profits from customers who are settling their loans early. As per the Central Bank of UAE regulations that came into effect in April 2011, the maximum penalty of early settlement is 1 per cent of the remaining principal balance.
Debt panellist 2: Ambareen Musa, founder and chief executive of comparison website Souqalmal.com
Under debt restructuring, the bank turns your credit card debt into an unsecured loan, wherein you are charged an interest rate and are required to repay the loan in monthly instalments over a fixed tenure. In essence, it works like a standard personal loan, but the terms and conditions may vary across banks.
Check your loan terms and conditions and go through the fine print to see if there’s scope for negotiation here. If the terms are just like a conventional loan, you will not be liable to pay any more than 1 per cent of the outstanding amount.
If you have opted for Shariah-compliant finance through an Islamic bank, the early settlement clause may not be clearly stated in your contract. This is because Islamic finance does not work like a conventional loan. Instead of charging interest on the principal, the Islamic finance arrangement of the personal finance involves a commodity which is sold to the customer at a profit on a deferred payment basis (Murabaha). Therefore, if you want to prepay, the bank may require you to pay all future profits too.
However, it is common practice for banks to give a discount to facilitate an early settlement and you may not end up paying the profit for the entire original tenure. This is allowed at the bank’s discretion, therefore it would be best if you try to negotiate the prepayment and final settlement with your bank.
The Debt Panel brings together four financial experts: Jamal Alvi, the chief credit officer at Abu Dhabi Islamic Bank; Ambareen Musa, the founder and chief executive of the comparison website Souqalmal.com; Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life; and Keren Bobker, The National’s On Your Side columnist and an independent financial adviser with Holborn Assets in Dubai. Together they answer queries in a weekly online column to help readers better tackle their debts. If you have a question for the panel, write to pf@thenational.ae.
