Almost daily we see temptations to buy a car, a new villa or apartment, nice furniture and to have dinner in a nice restaurant. Who am I to the advertisers? I can’t afford to buy all those things with my earnings, but still it stays in my thoughts. What if I could buy that new car now or book that holiday to Australia. The ‘what if’, is not anymore a fantasy when somebody offers to pay it on your behalf and you only have to pay it back in small installments. You are tempted and agree. You enjoy your new car or holiday initially, but you get used to it soon. What you will not forget about is that you need to pay the money back that you borrowed. Ladies and gentlemen, you are now in debt.
According to Payfort, 46.7% of the UAE population, approx 4.3 million people have a debt. 19% of the UAE population is between 0-19 years and it’s impossible for them to take a loan. This means that it is in reality 57% of the UAE population who are eligible and have a debt. That is is almost 6 out of 10 people, so if you look around in your office almost 6 out of 10 of your colleagues have a debt.
Easy money come easy money go. We all heard this saying before, but it’s true. You think twice before you spend your hard earned money cash on a car. It is different when you can get it without paying almost nothing, which is on credit. You might not think long about it anymore. You only imagine how much better your life will be with that new car.
Getting a loan in the UAE is very easy. Just like that, you can get credit cards, personal loans, car loans and even house loans or business loans. Debt is something which is very dangerous, without you even noticing it. Why is debt so dangerous? You don’t own the car, property or anything else you buy on debt that is an asset. The bank owns it. This means that if you fail to pay they the loan back they will take it away from you. Selling it often for a lower market price leaving you behind to pay back the remaining amount outstanding.
Another very important reason why debt is so dangerous is that you pay interest on it. Remember this, when you pay interest, you don’t pay the amount back you are just paying back the extra charge that a bank or lender has put on borrowing you the money. Credit cards can have up to 60% annual interest. For example you have have AED 50,000 credit card debt. You are paying AED 30,000 a year just on interest if you don’t manage to reduce the credit card amount which is outstanding.
In principle, a debt can be managed. However certain people might have a tendency to find a way out of their debt situation by taking on more debt. In reality this makes things only worse. Let’s say you have a personal loan and you fall behind your monthly installments. You will get pressured to pay the installments, without money on your bank you might decide to take a credit card withdraw to pay back the installments. You have now made things worse. You have now with two banks a loan and they both want their money from you and they add extra charges for falling behind with the payments. On top of that the credit card interest rate is the highest possible.
Car loans are something which seem to be a good deal. With 10-15% cash down payment you own a car which is in your mind an asset, but in reality its a liability. You get a loan on the showroom value of the car. Which is for example AED 200,000. You pay AED 30,000 (15%) cash and borrow AED 170,000 (85%) on some percentage of interest which you need to pay back in 3 or 5 years. When you leave the showroom with your car, the value drops immediately with 20%. If you turn around and want to sell the car back to the dealer he will buy it back for at least 20% less. Your car has at day 1 a resale value of AED 160,000. The car value will keep dropping, but your loan not, unless you pay it all back with interest. Buying a new car financed is the quickest way to throw your money out of the window. Whenever you want to sell it, the loan amount will always be higher than the car value. You have wasted your credit on a depreciating asset.
Personal loans can sound quite good. A loan for you personally. The interest rates however are not personal, they are quite high for everybody. At least 5% or more. You borrow AED 300,000. You will pay every year first AED 15,000 interest and everything extra you pay is to bring down your outstanding loan. Failing to keep up with the installments will lead to penalty charges, for example missing a couple of months of installments or not paying the total monthly installment. Paying back your personal loan earlier will be penalized by extra charges. Doesn’t sound so personal anymore.
House loans is something that UAE residents were quick to take during the real estate boom in 2013 and 2014. The rents were going up, the real estate prices were also going up, therefore there was a lot of money to be made. So what can go wrong now? The rents are dropping and the real estate prices are going down. This means that an investors and tenants are less interested in your real estate. The investor is less interested because the yield is going down, and tenants are discouraged since the difference in cost between renting or buying has become smaller. Meanwhile if you want to sell it, you need to sell it at a lower price than that you bought it for and will effectively make a loss. In case you leave the country, you must rent it out. Rents are going down and lowering your income, but your home loan installments are going up. How is this possible? The AED is pegged against the dollar and EIBOR (the central bank charge) has been going up, because the FED is increasing the interest. A decision in the US is affecting your wallet. This results in a higher EIBOR interest which comes on top of the banks interest. Simultaneously your maintenance charges are also going up. Your fixed cost (EIBOR + maintenance charges) is going up, the asset value is going down and your potential income (rent) is also going down. That nice idea of having your own home is suddenly not so attractive anymore.
UAE residents are bombarded by messages about getting loans in 1-2-3. But is it really adding value to them? Maybe you can’t buy that nice car, home or trip to Australia, but you will not be in debt. There is no protection and we all know what happens if we fail to pay our loans in the UAE. The bankruptcy laws are very clear about this. I’m a strong believer of squeezing your fingers till it almost hurts and ask yourself: can I really afford this right now? Do I really need this? If you can’t afford it right now, then there is a reason why. Taking a short cut to buy things which normally were not possible comes with a price.
We are not living in a charitable society where things are given for free. Nothing comes for free when corporations offer it to you, especially when it’s a loan. Getting yourself in to debt is easy, coming out of debt unfortunately not. I have seen too many cases of people whose lives are ruined because of it. There is no easy way out of debt, the only way out of debt is by paying it back. Paying back something for many years is hard and tough. You might strongly regret getting in debt in the first place.
What are your experiences with debt? ans