2 in 5 UAE residents can't tell flat from reducing interest rate

Even as we UAE residents are generally considered to be savvy with our money, a new financial literacy survey conducted by Souqalmal.com highlights how little we understand the intricacies of finance - and, therefore, end up paying more than we might have bargained for.

As many as four out of 10 UAE residents say they can’t tell the difference between a flat and a reducing interest rate, according to the latest survey from Souqalmal.com, a financial comparison portal.

Over the tenure of a loan, say 5 years, that subtle difference can add up to a huge sum of money – money that an individual could save if only they’re aware of it.

While a flat rate calculates the repayments on the entire loan amount, a reducing balance rate only calculates the repayments on the outstanding balance.

In fact, the knowledge gap is wider amongst the local population, with 65 per cent of Emiratis confessing to not being aware of the difference.

The rate on the loan determines the monthly repayments which adds up to the Debt Burden Ratio (DBR) and decreases the level of disposable income every month.

Banks in the UAE use a combination of both rates in their advertising campaigns which can be very confusing for the consumer, says the financial comparison site.

Putting a flat and a reducing rate next to each other is like comparing apples and oranges, it explains.

To make the comparison much easier on UAE residents, Souqalmal.com says it shows both the flat rate and the equivalent reducing rate allowing for a fair comparison between rates offered by banks.

Credit where it is due

When it comes to credit cards in wallets, more than 65 per cent of respondents to the survey said they owned a credit card, with majority of the respondents (73 per cent) using their card to make regular purchases.

Cash leads the way amongst one-third of all the respondents (do not own a credit card) and more than half say they prefer to carry out day-to-day transactions with cash.

In addition to that, over one in four respondents opt out because they do not consider credit cards safe for making payments, and about one in five say they do not own a credit card because they do not know how it works – a clear sign highlighting the necessity to spread financial awareness.

The biggest financial crime?

Another striking revelation is that almost one in three UAE Nationals use their credit card to withdraw cash – one of the most expensive ways to access money due to the high fees levied on cash withdrawals by credit card companies.

“Financial literacy is a key component on our agenda for the UAE. We have been striving to raise awareness amongst residents and helping them make smarter financial decisions by allowing them to compare various financial products available in the market,” said Ambareen Musa, founder and CEO of Souqalmal.com.

“The survey turns our attention towards a significant knowledge gap, evident from the lack of understanding about some of the basic principles of rate calculation, but more importantly the use of a credit card to withdraw cash. This goes to show that financial education is still very much a priority in the UAE,” Musa added.

Need financial advice? Let’s Google it

Interestingly, when it comes to seeking financial advice, the majority of the respondents turn to friends and family for guidance rather than a financial advisor.

For UAE Nationals, the Internet has emerged as the main source of financial guidance, with almost 50 per cent seeking financial advice online.

In fact, financial advisors were the least favored choice for UAE residents followed by banks.

Additionally, 16 per cent of UAE residents choose to rely on their own judgement when making decisions on money matters.

“Being cautious of signing up for a financial product you do not understand is always a sensible approach, however, it is still essential to educate yourself about all the financial options available to you and how they might affect your current and future financial circumstances,” Musa concluded.

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