Drowning in a sea of loans

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It takes a very strong heart to resist the lure, especially when you struggle with escalating grocery bills, fees, fuel costs, rents and other expenses. There are those being crippled by the burden of loan repayments and struggling to meet the cost of living.

Then we have others who refuse to darken the threshold of any bank seeking a loan -- they budget, invest and save. Gulf News takes a look at individual experiences that could help others imbibe valuable lessons and perhaps adopt better practices.

Most expatriates come to the UAE with the dream of saving enough to perhaps build a home, buy land, educate their children well and maintain a lifestyle. Sometimes things go sour and dreams are lost in the labyrinth of daily struggles. As people battle to claw their way out, they use the support of loans only to realise that it just pushes them deeper into the darkness. Gulf News Community Journalist Sanya Nayeem speaks to three people trying to stay afloat in the flood of loan repayments.

Employed with an Abu Dhabi-based oil company, Khadri said the spiralling rent rates and cost of essentials took him by surprise. He said: "I didn't expect cost of living to rise so high; it was a very different scenario just two years ago."

Khadri knows where he went wrong. He said: "I took a new loan to pay back an old one and all my calculations went wrong when I did this. It was a very bad idea, and I landed in big trouble because I was sucked deeper into debt."

According to Khadri, loans are useful as long as one has a proper repayment plan and the money is utilised for a justifiable purpose.

He said: "The pressure builds when one faces unexpected expenses and is forced to divert the loan amount for other personal emergencies."
 
An added burden for residents with loans is the temptation of plastic money, Khadri said: "With credit cards, it is very easy to spend money one does not really have."

He said: "When I started my career, I did not have any loans, but eight years down the line, I owe the banks almost Dh200,000."
 
The irony is not lost on him. Khadri said: "The more I am working to earn a good living, the more I am in debt."

Mazhar Khadri
Issue: Paying off a loan taken to pay other loan amounts
Zoher Abuzar's dream is under construction. Building a house back in India, he is well aware of the immense grit and persistence it takes to see such a project through to its conclusion.

He said: "Constructing a house requires a lot of money. It was necessary for me to take a loan, otherwise I would not have opted for it."
A project coordinator with a Dubai-based real estate company, Abuzar said that even though the real estate sector is flourishing, property is steadily becoming more expensive.

With a recently acquired loan for his car, Abuzar now spends a majority of his monthly income settling his bills. He said: "More than half my salary goes into paying off my loans and I use the rest for rent, fuel and daily living."

A primary concern for Abuzar is that while the cost of living is rising steeply, most companies are not buffering its effects on employees by raising their salaries. He said: "I have about two-and-a-half years to finish repayment. It would help greatly if companies in the UAE considered their employees' situations and gave them a pay rise in these increasingly tough times."

It is not easy to pay back the bank. Loans are "long-term commitments", according to Abuzar, who said it was possible to complete repayment if one was able to "stay within a budget and manage other obligations responsibly".

He also suggested prioritising payments. He said: "Although most banks advise you to take loans that would make up 55 per cent of your salary, I would suggest not taking loans that exceed 35 per cent."

Cheryl Nadugo
Issue: High interest on loan repayment
Cheryl Nadugo, a Filipina expatriate, reckoned it would be safe to obtain a small bank loan since it would only involve payment in small tranches. Little did she know that she would end up paying twice the loan amount as interest.

A legal administrator, Nadugo said the bank's offer of easy-cash transfer through automated teller machines (ATM) was very attractive. She said: "I was only required to pay Dh320 to Dh350 a month and it was very convenient."

It was only later that she realised the catch -- it added up to an unreasonably high amount. Nadugo said: "The loan was about Dh10,000 for my brand new car, and I thought it would be a breeze to pay back. But when I checked my entire credit account, I realised I would end up paying almost Dh21,000."

Nadugo said she required a car as it was becoming very difficult to move from place to place.

She said: "Initially, the loan was a great help as I was able to get a car immediately, but as the prices and cost of living keep rising every day, I am finding it difficult to make ends meet."

Would it have been possible to forego the loan and find another way to pay for the vehicle?

Nadugo does not think so. She said: "I think most of us have are proud of our achievements and want to fulfil our dreams without anyone's help. I could have borrowed from family and friends, but I chose not to."

According to Nadugo, taking a loan to pay for her dream car was the right choice, but she has her moments of regret.

She said: "I am completely satisfied that I am able to pay for the car on my own, but you could say the experience has been bitter-sweet because I now have to figure out how to repay the loan as quickly as possible."

Nadugo said she wanted to avoid stretching the repayment over a long period of time.

If anything, the experience has made her much wiser.

She said: "Taking a loan is serious business. Although it is very helpful in times of emergencies, one must consider the consequences before acquiring a loan."

Nadugo urged controlling one's spending for a no-interest, foolproof plan of achieving one's dream.

Best practices
Before taking a loan, work out your budget and be disciplined.

Try not to be tempted by a better lifestyle and live within your means.

If you are in debt, talk to your bank and share your situation. The sooner such a difficulty is faced, the better.

Work out a programme for repaying your debt.

Pay back high-interest loans first, such as credit cards and then move on to low-interest loans, such as payment on cars.

Information on loans in the UAE:
Personal loans in UAE surged almost 40 per cent in 2007 and have almost doubled in the last four years.

High consumer spending boosted personal loans to Dh48.4 billion during the first quarter of 2008. It rose 11 per cent in three months, up from Dh43.5 billion at the end of 2007.

Under the existing rules, UAE nationals and expatriates can obtain a personal loan of up to Dh250,000 while UAE nationals can avail themselves of loans up to Dh2 million if they own a business.

According to data from the UAE Central Bank, consumer loans have soared more than 55 per cent since the end of 2006.

Loans to individuals rose to Dh49 billion at the end of March 2007, compared with Dh31 billion in December 2006.

Consumer loans have soared more than 73 per cent since the end of 2006 and almost doubled during the past four years.

As of September 1, 2008, consumer loans in the UAE surged 46 per cent during the past 12 months.

By Sanya Nayeem

© Gulf News 2008