Cash ruled the lives of a majority of people in the 80s and 90s. So much so that when credit cards started making its elite appearance in some wallets, it was frowned upon by the deep-rooted conservative behaviour, which held back many consumers from over leveraging. Lines of credit such as personal finance loans, in general, were a rarity and debt in any form was largely a social pariah. But not any more.
By the turn of the century, most economies were thriving on credit and do so even today. Easy access to loans and credit, high interest yielding instruments and the general ease of plastic money has made debt appealing - for all the right reasons.
According to global industry estimates, consumers in the developed world usually have access to 3.5 to 4 credit lines, which can be through credit cards, personal or a car loan, mortgage, etc. Although comparative figures aren't readily available for the UAE consumers, banks here are easily accessible and known to disburse loans with relative ease.
A line of credit, especially personal loans, is pretty beneficial if you find yourself in some of the following circumstances.
Paying for college: Education of children is not a sudden or an unforeseen expense and should ideally be taken care of with regular savings when your child is growing up. However, if for any reason you haven't been able to save much for your child's schooling or college, it is better to take a loan rather than dig into the emergency fund or retirement savings. Let your children pay you back in instalments, once they are on their own.
Paying off high-interest debt: If you have unmanageable outstanding on your credit card, taking a personal loan to pay it off is a wise decision. Imagine the kind of savings you will make. Instead of paying interest at up to three per cent per month, you can easily settle the payable due with this credit line from any bank in the UAE. Banks usually charge a third or lesser interest rate on personal loans.
To zero in on the best offer, log on to personal finance websites that allow comparison of interest rates.
Gentrification of a self-owned house: Renovations or any kind of improvement to the décor of a self-owned house that can potentially increase its money-value is an investment. A house with clean walls, up-to-date home maintenance system and immaculate interiors will always fetch more value than the one with languishing interiors.
Even if you are not planning to put your house on sale any time soon, taking a personal loan to upgrade the state of your abode is likely to bode well for you too. A well maintained and a clean house emits positive energy, and is known to calm the minds of its occupants.
Choice between a fixed and floating rate
Banks offer a choice between interest rates: flat and reducing. While a fixed rate usually looks more appealing, it is better to do a holistic comparison before signing on the dotted line. The idea is to calculate the total interest you would be paying to the bank during the loan period.
In case of a flat rate interest calculation, interest is calculated on the total loan amount and paid during the loan tenure. Whereas the reducing rate of interest calculates interest on the outstanding principal amount left. Illustratively, a loan of Dh100,000 at a flat rate of interest of 2.75 per cent would incur an interest of Dh11,000 in four years. Comparatively, a reducing rate of 5 per cent would attract an interest of Dh10,541 in the same period. Even though a flat interest rate of 2.75 per cent seems lower, it is not.
If you are intimidated by the calculations, ask the bank's representative for an illustration or a summary table for the loan calculation to get a better idea. You can also take help of readily available EMI calculators online to ascertain which option is better for you.
Charges
Besides, there are a bevy of charges that you have to pay for a loan. While these may vary according to the banks, you can expect a file or processing charge, a foreclosure charge, and premium for the insurance cover offered with the loan.
Choose smartly and borrow wisely.
By Suneeti Ahuja-Kohli
