Personal Loans: What you need to know!

You’d already know what personal loan is! To tell you briefly, personal loan is a loan which is issued to individuals (salaried or self employed) and may be used for any purpose that you may feel. This means, you can take a personal loan for your education, marriage expenses, vacation expenses or any personal use you deem fit. Many of you may have already had personal loans in the past or may be having personal loans right now. But do you know what are the Central Bank rules with regard to personal loans? Do you know how the banks process personal loans?

In this post, I will explain to you what are the central bank rules on personal loans and the process of the banks.

There are 2 things to be considered here: 

There are central bank rules on personal loans and there are bank’s internal rules for personal loans. While the central bank’s rules are same to all banks and finance companies, each bank has its own set of rules which govern their processes and risk taking appetite.

UAE Central bank definition of personal loan:

“Personal Loan is a loan that is given to individual customers, where repayments are made out of salary and end of service indemnity and/or any other verifiable regular income from a well defined source.”

UAE Central Bank rules on Personal Loans:

Central Bank of UAE has set out certain rules with regard to the personal loans and they are below:

Limit:

Amount of personal loan has been set at Twenty times the monthly salary or the total income of the borrower. This means your total personal loan eligibility is 20 times your monthly gross salary. For example: If your monthly salary is AED 10000, then you are eligible for AED 200000 in total personal loan. But also note that your DBR and other factors should fit in!

Repayment Period:

The repayment period of personal loans must not exceed 48 months.

DBR:  

Deductions from salary or regular income of any borrower, for all types of loans extended by banks and finance companies together, including, but not necessarily restricted to, car and private housing loans, overdraft facilities and credit cards, must not exceed 50% of gross salary and any regular income from a defined and specific source at any time. DBR for retirees is set at 30% of pension salaries. In the post on how to calculate DBR, I have a nifty DBR calculator, which you can use to calculate your DBR.

Security Check: 

Banks and Finance companies may only take from the customer the number of post-dated cheques covering the installment and of value not exceeding 120% of the value of the loan or the debit balance.

Personal Loans to self employed: 

Loans extended to sole proprietorship firms and companies, secured by salary of the owner or salaries of the partners shall be treated the same way personal loan is treated and shall be subject o to the same terms and conditions.

Loans to Armed Forces:

DBR is set at 50%. Military ID’s should not be taken. If the bank or the finance company does not adhere to these rules, the Armed Forces may transfer the salary to any other bank without referring to the bank that extended the loan.

Application forms: 

Personal Loans shall be extended as per an application by the customer to be approved by the bank or the finance company and it should be included in standard agreement.

Processing fee:

Processing fee on personal loans can not be more than AED 2500/-.

These are the basic rules that govern personal loans and are issued from Central Bank of UAE.

Rules of the banks and finance companies on Personal Loan:

For banks, personal loan is one of the most risky type of loan. Banks have their own set of rules over and above what Central Bank of UAE has set out. Banks can not breach any of the central bank rules. The rules of the banks keep changing depending on their risk taking appetite and various other factors.

Types of Personal Loans:

There are basically 2 types of loans that banks provide:

1. Salary Transfer Loan;
2. Non-salary Transfer Loan.

If your salary is credited to a particular bank, you are eligible for Salary Transfer Loan. Interest rates on these type of loans typically tend to be lower. On the other hand, if your salary is not transferred to a bank and they provide you a personal loan, this is called non-salary transfer loan.

Rules of salary transfer personal loan:

As I already mentioned, personal loans are a risky type of loan because you are not providing any collateral or security to the bank (except may be post dated cheques). Therefore, banks have something called Listed Companies. If your company is listed with a bank, the criteria of personal loan, credit card, car loan may be relaxed.

What is a Listed Company for personal loan?

When a bank says that your company is listed with them, it means that your company is pre-approved to be considered for various banking products like credit cards, personal loans etc. Most banks need that your company be in business for a minimum of 2 years within UAE and have satisfactory level of revenue. Banks also look into the financial records of the company and look for stability through the financials. When a bank or a finance company lists your company, you may receive preferred interest rates, relaxed criteria etc. Before listing your company, banks study the profile of your company and make sure that your company meets the criteria of risk as per bank’s standards. This also means that your company has agreed to provide salary transfer letter to the bank in the format of the bank.

What is a non listed company? Personal Loans without company listing:

A non listed company is the one which is not listed with the bank. This may mean that the bank may not be comfortable with your company’s profile. Banks may still provide you with personal loan, credit card etc but the rate of interest may be higher than the listed companies. For example: if for a listed company, bank interest rates are around 6%, for a non listed entity, it may be between 9% to 16% when you salary is transferred to a bank. A bank may still approve your loan if your company is not listed with them, but the interest rates will be higher than that of listed company. Certain banks do provide this facility. To learn more about these banks, please visit: Souqalmal.

Personal loan without Salary transfer:

Within personal loans, these type of loans are very risky for the bank as your salary may not be getting credited to that particular bank. Mostly, finance companies where you may not be able to transfer your salaries approve these kinds of loans. Without a doubt, the interest rates on these types of loans are quite high ranging 15% to 36%.

What is Salary Transfer Letter?

A salary transfer letter (STL) is a letter issued by your company on the letterhead which mentions that your salary will only be credited to the bank approving personal loan. Your End of Service Benefits will also be credited to this account. Your company undertakes that your salary will not be transferred anywhere else without a clearance letter from the bank.

What is the process of Personal Loan?

The process of personal loan is very straightforward:

1. You approach the bank or finance company through any of the medium like online, branch, sales team etc and express your desire to apply for a personal loan;
2. Bank / Finance Company will request you for following documents:
   • Duly filled application form;
   • Valid Passport copy;
   • Valid visa copy; (in case of expatriates)
   • Copy of Emirates ID;
   • Company ID or Labour Card (if applicable);
   • 3 or 6 month bank statement;
   • Original Salary Transfer Letter.
3. Once the bank representative has verified your documents against the originals, they are entered into the Loan system and the documents are forwarded to processing centre (electronically or physically);
4. The receiving department at the processing centre verifies the details and carries on credit checks like Etihad Credit Bureau checks, Central Bank system checks, internal system checks etc;
5. Once that is done, the application is forwarded to the Underwriter who approves or declines the application after looking into various aspects whether you fit the bank’s internal policies, your profile, Central Bank rules etc.
6. Once the approval is done, a call verification may be done at your employer’s office;
7. When the checks are positive, the application is sent for disbursal of the loan.
8. You will be notified on the approval – Money in your bank account.

Why was your Personal Loan rejected?

You may have applied for a personal loan but, it may be rejected. What could be the reasons? Below I list some of the reasons due to which your application may be rejected:

1. High DBR: If your Debt Burden Ratio is higher than 50%, the level of amount you applied for may not be approved. Worst case, if your DBR is already above 50%, banks may reject your personal loan application. Central bank allows maximum of 50% DBR.
2. Bad payment history: Banks now have access to your credit history through Etihad Credit Bureau. If you past payment history is not up to the satisfaction of the bank, then your loan application may be rejected.
3. Irregular bank transactions: If your bank account shows irregular transactions like full withdrawal of amount soon after salary credits and other similar irregularities, the bank may reject your loan application.

How to increase chances of approval of your personal loan?

The rules here are simple:

1. Maintain a healthy credit profile: If you have existing credit cards, make sure you do not delay on any payments. If you have other monthly installment loans, keep the payment record intact.
2. Maintain a good bank statement: Make sure that your bank statement reflect your salary monthly and do not overdraw your account.
3. Do not apply for loans with more than one institute: With the consolidation of banking records at Etihad Credit Bureau, the banks will now have access to your credit profile and your current outstanding applications. It’d be a good idea if you intend to apply for a personal loan, apply only with one bank. With the availability of your financial data, banks can now build your financial profile and judge you according to that.

What liabilities are considered to calculate DBR?

Banks consider your regular debits for loans, 5% of the credit card limit, mortgage installments as part of liability. Your home loans back in your country may not be considered as part of DBR. Banks also do not consider insurance premium as liability.

Should you take a personal loan?

In my opinion, you must take personal loan only for productive purposes. I mean take personal loan for down payment of your home back home, education purpose etc. These kinds of expenses have long term benefit on your finances. You should also take personal loans and settle your large credit card outstanding. Credit card interest rates are some of the highest. You should always make it a point to close credit card outstanding with a personal loan. I believe, you should not take personal loan to go on a vacation (save regularly for this purpose instead), for marriage purpose etc.

This was in brief about personal loans. My suggestion is that you be careful while taking this type of loan only as per your needs. If you have a stable job, you may go for personal loan. If you have any queries or suggestions, do comment below.