Applying for a loan in the UAE? Here are 11 key terms you need to know

Dubai: Signing up for a loan can be a significant decision, especially when it comes with a dizzying glossary of words you are hearing for the first time – from amortization schedules to deferments and reducing interest rates.

If you are new to the world of loans, take a look at our guide below. We’re breaking down key phrases and terms for you, so that you can go into the process fully informed.

1. Credit score

According to the Etihad Credit Bureau (ECB), the credit score is a number that represents your credit history and your ability to pay your loans and financial obligations. It’s a grade that the ECB gives you, that lets banks and other lenders know your creditworthiness. If you score high, you can receive access to quicker pre-approvals on financial services, and avail of lower interest rates. The ECB categorises credit scores in this way:

• Excellent: Score range of 746 to 900
• Very good: Score range of 711 to 745
• Good: Score range of 651 to 710
• Fair: Score range of 541 to 650

Below 540, you may find it difficult to get applications for loans or credit cards approved.

A low score can be improved by good practices: ensure you pay your bills and loans on time, manage credit limits well, and keep your loans and credit cards to a minimum. Check your credit score on ECB’s website for Dh10.50: etihadbureau.ae/Individual/CreditScore.

2. Equated monthly instalments

An equated monthly instalment (EMI) is a fixed, recurring payment made by a borrower to the bank on a specific date each month. It’s usually used to pay off both the principal amount, and the accrued interest on the loan over a set period. Missing an EMI can trigger instant financial penalties by the bank, which get added to your outstanding balance. Repeated delays in payments may also affect your credit score, and lead to higher interest rates if you are classified as a high-risk borrower by the bank.

3. Salary transfer loan

This is a common loan type in the UAE, which requires you to transfer your monthly salary directly to the lending bank, as a repayment security measure. Because your incoming salary guarantees the bank a steady repayment stream, you’re more likely to receive lower interest rates when you apply for a loan from the same bank, as well as faster approvals and processing times.

4. Non-salary transfer loan

This is an unsecured personal loan, where the bank does not require you to transfer your monthly salary to their institution. Your salary remains in your current bank, while you make monthly repayments to the new lender via a Direct Debit system. While this method offers flexibility and convenience, since you don’t need to switch your payroll or open a new account, it may also cause you to incur higher interest rates and go through stricter eligibility criteria if your employer is not on the bank’s pre-approved list.

5. Flat interest rate

When applying for a loan, you have the option to accept a flat interest rate. This rate is calculated on the full loan amount for the entire loan term, without taking into consideration that payments over time reduce the amount borrowed. In other words, even as you make monthly payments, and the outstanding loan balance reduces, interest continues to be charged as if you still owe the bank the original amount.

6. Reducing interest rate

On the other hand, a reducing interest rate is calculated every month on the outstanding loan balance. The charge is applied only to the outstanding principal balance, rather than the full original loan amount. Since the base amount reduces every time you pay your monthly instalment, the interest for each month is calculated on a gradually shrinking remaining balance. So, the total interest paid over the life of the loan is significantly lower, too.

7. Early settlement fee

This is a one-time penalty charged by the bank, when the borrower repays a loan in full before its scheduled maturity date. The bank calculates the fee based only on what you still owe, and not the original loan amount. Moreover, the Central Bank of the UAE (CBUAE) regulates early settlement fees for personal, auto, and home loans, by capping it at 1% of the outstanding principal amount.

8. Cooling-off period

In the UAE, a cooling-off period is a legally mandated window of five business days after you sign a loan agreement. This duration gives you the option to cancel the loan without paying any penalties or early settlement charges. If you’re certain about the loan, however, you don’t have to wait for the full five days to end – you can sign a waiver that commits you to the loan immediately.

9. Deferment

A deferment allows you to postpone your EMI payments by one month. Typically, a fee of Dh100 applies when you avail of this service. Most banks in the UAE allow you to defer two instalments in one loan year.

10. Amortization schedule

This is a detailed table that breaks down your loan payments over time. It shows the principal amount and the interest amount that comprises each EMI, until the loan is paid off at the end of its term. Amortization schedules also include other important information, such as the amount of interest and principal you have already paid, as well as the remaining outstanding balance.

11. Topping up

If you already have a personal loan, but suddenly find yourself in need of more cash, you might be thinking of applying for another loan. There is another viable option, however: a top-up loan. This is a financial booster for people who already have an active loan, enjoy a good credit score, and can show strong repayment history. In order to qualify, most banks require applicants to make regular payments without defaulting for at least 12 EMIs (although the EMI duration criteria varies from bank to bank). It may be easier to top up than apply for a new loan, since the lender already has your details, and it often involves lower interest rates compared to new personal loans.