I recently borrowed Dh100,000 from a relative to pay off my credit card bills because the interest payments were becoming too burdensome. My salary is Dh30,000 and I rarely have any money left at the end of the month which is how I ended up in debt. I do not want to fail to pay back my relative’s generosity but am concerned that without extra income I won’t be able to do it. How best can I resolve this? What amounts and what frequencies are best to pay the money back without getting stuck in credit card debt again? Are there any tools or methods I can use to help me curb my expenditure?
Debt panellist 1: Keren Bobker, The National's On Your Side columnist and an independent financial adviser with Holborn Assets
Where a person has financial difficulties it can be very useful to have a relative to assist such as in this case but it is also important to discuss this properly. Too many family members have fallen out over money issues as how and when monies should be repaid was not made clear at outset and there have been different expectations. Ideally how and when the monies will be repaid should have been discussed and agreed before it was loaned but that does not mean both parties can’t do this now.
I consider it very important to draw up a written agreement so that everyone is clear about the terms. This agreement, which should be signed by both parties, should list all the terms and conditions including:
• the amount borrowed and if this is to be a one-off payment only
• the date the money was lent
• the date that full repayment is expected
• how the loan is to be repaid — whether as a payment in full, or in instalments
• if interest is payable and if so at what rate and is it an annual or one-off payment?
• are repayments to be made in cash, by cheque, or by bank transfer?
• if any additional fees are to be paid such as the recipient covering bank charges
• what happens if payments are not made as agreed?
In theory, a verbal agreement can be considered legally binding, but that is still one person’s word against another’s. So, even if there is a high level of trust, having everything set out in writing is fairer to everyone and ensures that there are no misunderstandings at a later date. The wording of the agreement should be such that it suits everyone’s requirements and needs.
The interest charged by banks for personal loans is high compared to the interest rates available on savings accounts so both parties can benefit financially from such agreements. The downside can be family rifts if monies are not repaid as agreed so it is important to do things properly.
If someone has borrowed money from a family member, even though there may be fewer legal consequences, it is very important that they view this as seriously as borrowing from a financial institution. This means they have to plan their finances better so that they do not take on any more debt and find a way to live within their means. For most people, this means keeping a proper monthly budget of all spending and being financially disciplined.
Debt panellist 2: Jamal Alvi, chief credit officer at Abu Dhabi Islamic Bank (ADIB)
There are a few simple rules that will help you manage your debts. Try to spend less than what you earn, and before taking on debt of any kind make sure you’re aware of all fees and charges and prepared to make the monthly payments — even if your financial circumstances change. In general no more than a third of your income should go to debt payments. Your top priority should be to avoid taking on any more debt — that way at least the problem won’t get worse, and any progress you make will be clear. Next, try to rank your debts in terms of their size and monthly payments, and crucially, the cost of each debt. Debts with the highest rates — typically credit card debts — should always be tackled first since they’re they most expensive over time.
A monthly budget can help you cut expenses and divert more money to debt payments, and of course any extra cash, such as bonuses, should go towards them as well. Once you’ve paid off that debt, move on to the one with the next highest cost.
If you’re struggling even to meet your monthly payments, it might be time to talk to your bank. A good financial provider is always there to help, and working out a sustainable solution to your debt issues is in the best interests of both sides.
The Debt Panel brings together four financial experts: Jamal Alvi, the chief credit officer at Abu Dhabi Islamic Bank (ADIB); 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 email@example.com.
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