The Debt Panel: 'my bank won't top-up my loan after I missed one repayment'

The American fell into financial difficulties after his mother had a car accident in the US

Illustration by Mathew Kurian

I am a US expat working in the aviation industry earning Dh35,000 a month and I have run into financial difficulties. I moved to the UAE in 2014 and took out a loan for Dh670,000 in August last year to cover expenses and to support family at home, including my son who goes to college. Then in October my mother had a car accident and I needed further funds to help her. I tried topping up the loan but was told I was not eligible, so I took an advance salary payment from my company. This meant I had no salary in March and I missed the loan repayment as a result. In total I owe:

Personal loan: Dh587,614 (monthly payment of Dh16,394)

Credit card: Dh27,737 (monthly payment of Dh1,500)

Total: Dh615,351 (Dh17,894)

I am 55 and live in Abu Dhabi. The original loan was used to help me get established here as my company does not provide housing or transportation. I cannot get a top up from the bank as my company is no longer listed with them. I also tried to use a debt management company but the bank says it has restrictions on working with such firms. My expenses are Dh25,000 every six months for rent; Dh200 for utilities; Dh600 for groceries; Dh2,000 a month for phone and internet; Dh300 for my car (which I own outright) and between Dh2,000 to Dh4,000 in remittances to cover my mortgage in the US and my son's college fees. How can I resolve my financial situation? RP, Abu Dhabi

Debt panellist 1: Philip King, head of retail banking at Abu Dhabi Islamic Bank

Your current debt burden ratio (DBR) is more than 50 per cent of your monthly salary and your outstanding loan-to-salary ratio hovers close to the maximum threshold. The fact you have missed a loan repayment in the past will have weakened your rating with the Al Etihad Credit Bureau and it is therefore unlikely that banks will allow you to take on further debt.

If you feel that you may struggle to make a particular repayment, arrange an instalment postponement with your bank.

You should not seek to incur more liabilities but instead focus on proper financial management which involves decreasing expenses and living within your means. You should also meet your bank to discuss the possibility of restructuring your loan with lower monthly instalments over a longer repayment term.

Ensuring you make your monthly repayments in full and on time is a priority, as missed payments result in accumulated arrears and can result in hefty penalty charges that will ultimately make your journey out of debt more challenging. If you feel that you may struggle to make a particular repayment, arrange an instalment postponement with your bank and ensure you return to the schedule the following month.

Also review your current expenses by looking at moving to a smaller apartment, cutting down your telephone costs, and asking for assistance from other family members to contribute to support your mother and son. If there is no other relative who can provide financial support, then sell your car or other assets to raise emergency funds and then either rent a car or use public transportation while you rebuild your financial position.

Looking at your current budget, it appears you still have savings of roughly Dh6,000 each month, which can also be directed to support your family or used as a buffer should you run into future financial emergencies.

Debt panellist 2: Steve Cronin, founder of DeadSimpleSaving.com

Your situation is not great but it’s also not disastrous. You have a good, tax-free salary and your monthly expenses do not exceed your monthly salary. Even if you allocate a portion of your rent to each month and assume the highest remittance level (Dh4,000), you still have Dh5,839 left over to help pay off your debts and build a cash buffer. Ignoring the rent for cash flow purposes and in a month where remittances are Dh2,000, you will have Dh12,000 left over.

What you need is a plan rather than any drastic and risky action. Map out all your income and loan payments for the next year, to create a cash flow calendar. Add in any other large payments like rent. Take this to your bank, because communication is essential.

The bank may have been able to grant you a payment holiday for a month if you had discussed the March issue with them in advance. They may even be able to grant you another payment holiday if you need it, for example in the month your rent is due.

Make sure you have enough spare cash to make the next loan payment without fail. Then estimate how much will be left over at the end of the month. Leave Dh1,000 — Dh2,000 as an embryonic cash buffer to prevent cash flow shocks from unexpected bills. Then put everything else towards paying off your credit card. It is not good enough to pay only the minimum amount each month, as the interest owed will grow rapidly.

Once your credit card is paid off, your spare cash has two parallel purposes. Build a cash buffer of three to six months' total expenses, so that if you lose your job or your family has unexpected medical bills, you won’t face financial disaster. At the same time, build up a fund with the aim of paying off your loan early. There will be penalty charges for this, so understand these and time the payments accordingly, e.g. once a year.

To do all this effectively, you need to boost your income and reduce your expenses. More radical solutions include downsizing your house in the US, asking your son to get a part-time job to support college payments, downsizing your accommodation in Abu Dhabi to reduce rent and selling your car.

See if there are ways to generate additional income. Ask your company for extra responsibility or start looking around for a better-paid job. See if there are ways to earn money in the evenings and on weekends, either consulting with your specialist expertise or more general support. Every extra dirham will make your life easier. Expect a tough year or so but resolve to get yourself out of this situation.

Debt panellist 3: Ambareen Musa, founder and chief executive of Souqalmal.com

Yours is a classic case of over-reliance on debt and lack of focus on building a rainy-day fund. With no emergency savings to fall back on, you automatically had to rely on debt to support you through financial hardship.

You take home a decent pay cheque by UAE standards, however, you're currently spending over 50 per cent of your monthly income on debt repayments, and an additional 30 per cent on living expenses (plus remittances). That still leaves you with 20 per cent of your income that's unaccounted for. Considering that you've been in the UAE for about five years now, this leftover income could have translated into major savings by now.

Take a closer look at your expenses and figure out where you can make cutbacks. For instance, you are spending a significant amount on phone/internet services. Consider downgrading your current telecom package and saving on such costs. You could also temporarily lower your remittances to just cover your primary and non-negotiable financial commitments back home. Could your son help ease your financial burden by taking on a part-time job while studying?

On the debt front, have you reached out to your bank to discuss restructuring your debt repayment terms? Since you've already missed one loan instalment, the bank may be open to offering you a more relaxed repayment plan to avoid the possibility of a loan default. If the bank is not willing to work with a debt management company operating on your behalf (this isn't as popular or prevalent in the UAE as it is in the US), try to take the negotiations into your own hands.

Have you approached other banks to see if they can offer you better loan terms? Other banks may be willing to buy out your existing loan or offer you a debt consolidation facility. A buy-out loan could potentially give you access to a lower interest rate and longer loan tenure, making your monthly loan repayments easier to manage.

A debt consolidation loan could help combine your expensive credit card debt with the personal loan, and also give you access to lower interest rates and a longer repayment tenure. It may also be worth checking if the company you work for, features on another bank's list of approved employers. This can significantly improve your negotiating capability with the bank.

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]