Marcus did not particularly care how much his loans would cost him when he applied. At the time he just wanted the money.
But now, with four loans with annual rates ranging between 28 per cent and 33.36 per cent and little money to live on once he meets the monthly instalments, the Filipino, who did not want to reveal his full name, is beside himself with worry.
He says the sales teams promised him a good rate and although he looked for it before he signed the agreement, he did not fully understand it and it was not explained to him.
“At that time I was very much in need of money because we were devastated by typhoon Haiyan. It was the strongest typhoon we have had in our country. It was more than 500,000 pesos, for the repairs and the renovations [to our home]. In dirhams it was 72,000, approximately,” he says. “In addition, I sent money for my mum’s hospitalisation.”
Marcus took out four loans with three banks totalling Dh284,600 – two with Dubai Islamic Bank (DIB), one with FGB and one with Dunia Finance.
“I applied for more because I wanted to cover up the loans I had taken out in previous years but my strategy was not right. It’s pulling me down,” he says.
His repayments (including a credit card) amount to about Dh11,112 a month. He earns Dh9,283. He regularly misses his payments and lives under the threat of the banks raising police cases against him.
The National has been highlighting the high level of indebtedness in the UAE over the past year, firstly through a series of articles on the issue and then through the launch of The Debt Panel, a weekly column tackling debt issues among readers.
What the column has highlighted, however, is that with such high interest rates applied to financial products and with many borrowers over the 50 per cent debt burden ratio set by the Central Bank (those that have over half their income going towards debt repayments cannot qualify for debt consolidation products), for many there is no solution.
What is alarming about Marcus’s case is the high rates applied to his loans.
Dunia, from which he borrowed Dh57,000, has lowered the annual rate to 33.6 per cent from 39.99 per cent, but will not extend the tenure of the loan.
A spokesman said the bank works proactively with customers facing financial difficulties to understand their needs to “explore the possibility of designing custom solutions in line with their expected future cash flows, within the boundaries of the applicable Central Bank regulations and/or our prudent credit guidelines”.
“It is for this reason that on a regular basis, we run debt assistance management clinics for Dunia customers. At these sessions, we invite customers to approach us with their concerns so that we may explore the possibility of easier payment plans for the outstanding debt amounts on their personal loans and credit cards.”
While a loan rate of up to 39.99 per cent may seem excessive to some, Ambareen Musa of the financial comparison site Souqalmal.com says a borrower’s creditworthiness has traditionally been evaluated on salary and employer profile. She adds that loans that don’t require a salary transfer to the lending bank come with much higher rates than those where the borrower agrees to transfer his or her salary.
“In the specific case of Dunia Finance, their non-salary transfer personal loan rates start from 14 per cent per annum, and go up to 39.99 per cent per annum based on the customer’s profile and salary,” says Ms Musa. “So, while an applicant earning above Dh22,000 a month can get a rate between 14 per cent to 34 per cent a year from Dunia, those earning between Dh5,000 to Dh7,000 can only qualify for finance at rates ranging from 36 per cent to 39.99 per cent.”
For debtors such as Marcus, paying off a loan at such a high rate along with his other liabilities quickly becomes a challenge.
“It is killing me,” says the 38-year-old. “I don’t have a good night’s sleep. I am thinking of a way where I can resolve my issues. I used to write an email and I used to personally visit the branch, especially Dubai Islamic Bank. I have done that many times. I have applied for consolidation or a reconstruction of my loan but unfortunately they said no. They said ‘I’m sorry Marcus.”
The National has also contacted the banks on Marcus’s behalf to try to renegotiate his debts, proposing that he extends the tenure of the four loans by a further 34 months, thereby reducing his monthly cost.
DIB, which Marcus has two personal loans with totalling Dh179,000, said it is determining if an “amicable solution” can be found. “We have been in touch with [Marcus] to inform him that his case is being looked into again and we are our trying our best to see how we can work together with him given his current circumstances,” it said. FGB, which Marcus has a loan with for Dh48,600, invited him to discuss his case with its collection team this week with plans to consolidate the loan and an outstanding credit card debt into a lower payment of Dh1,500, subject to approval.
Unfortunately, Marcus’s case is depressingly familiar to many in the UAE.
Olena Sokolnikova, 33, from Ukraine, has a Dh20,000 outstanding loan with Dunia and a credit card balance of Dh40,000, also with Dunia. Both have an annual rate of 39.99 per cent. Her salary is Dh6,000.
“I took a loan from Dunia Finance because the company where I am working is not listed by any bank in the UAE. To be listed we should have 15 employees. So all banks refused to give me a loan. When I took the loan they also gave me a credit card that I used as well but I was always paying for it until payments became really out of control,” she says.
“I am able to pay my loan but the credit card rate is so crazy that I am not able to pay, and more than that, with such high interest I will pay for the rest of my life,” she says.
She has been offered a settlement plan of Dh1,750 a month over eight years to pay off the credit card (which equates to a rate of 51.57 per cent a year), but she has asked them to reduce the tenure. She is ready to pay Dh1,500 a month for five years (which would be a rate of 38.1 per cent) to clear her credit card, but she does not think the bank will agree.
“Dunia told me if I can’t pay they will process my cheque to the police and take me to court. I am not really afraid of that because I know that the judge most probably will give me better payment plan that I will be able to pay.”
While loan rates of 39.99 per cent are extremely high on loans, they are more standard on credit cards.
“Compared to personal loans, credit cards are easier to qualify for, provide instant access to credit and repayments can be postponed. These reasons contribute to the high interest rates on cards,” says Ms Musa, who says that based on Souqalmal.com’s analysis, the current average APR for credit cards in the UAE is 39.94 per cent, significantly higher than the average starting rate for salary-transfer personal loans at 6.67 per cent a year or even that for non-salary transfer loans at 14.08 per cent a year.
Jon Richards, the founder and chief executive of Compareit4me, says generally all UAE banks have high interest rates on credit cards. “The exception comes from NBAD, whose lowest rate is just 1.59 per cent per month which is about two-thirds of the UAE average,” he adds.
So why are these rates so much higher than other developed countries like the US, where average APR is about 15 per cent, or the UK, where the average stands at 21 per cent, according to Ms Musa?
Kunal Malani, the head of customer value management for HSBC Middle East, says the higher rates have traditionally reflected the risk banks have faced when lending.
“Given the predominantly expat nature of the market and the fact that credit cards are not secured against any collateral, it has traditionally been very difficult for banks to assess the individual creditworthiness of customers – particularly prior to the development of the credit bureau.”
Al Etihad Credit Bureau, a government initiative that keeps a record of everyone’s credit obligations in the UAE, started issuing reports on people’s debt levels in 2014, providing an accurate measure of people’s credit worthiness. Experts say there is a period of adaptation after a bureau is founded, meaning banks do not reduce their interest rates instantly. But they are expected to fall eventually.
Mr Malani and other people working in the industry expect banks to offer those who have lived in the UAE for a while and established a stable credit history with reasonably low levels of debt better rates. He says rates are calculated based on a series of factors including the cost of funds, which is quite low here because the dirham is pegged to the dollar; a risk premium; the cost of operations; and a profit margin for the bank. Credit cards, for instance, bear higher operational costs so are typically a more expensive form of debt.
Ms Musa says that while the interest rate on credit cards is fixed, it can be negotiated before applying for loans in some cases.
However, credit card customers also have the options of shopping around for a better deal and transferring their balance. There are zero-interest deals available in the market for three to six months for balance transfer customers.
Taking on a consolidation loan or applying for further credit is no longer an option for Marcus. He has no idea what he will do now but the lesson he has learnt is very clear – the implication of the interest rate.
“First thing, you should be well informed and educated about what this rate is all about. What you are signing. How this affects you. How long it will take to pay it off,” he says.
DIB, where Marcus transfers his salary, has now frozen his account, so he is no longer able to buy food, pay for his rent or withdraw any cash. Dunia has also told him they will file a police case against him because he has missed two consecutive monthly payments.
“I have nothing in my pocket. God gave me a good landlady. She gives me food for free and she is a very considerate person. The question is until when will she stop helping me.”
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