How to get a personal loan in the UAE: Rules, eligibility and required documents

Dubai: Financial emergencies can happen at any time – from unexpected car and home repairs, to unforeseen medical expenses. In such cases, if you don’t have enough money in the bank, a personal loan may be your best option. We break down the rules and regulations, the requirements you need to be aware of, and how to apply for a personal loan. What is a personal loan? A personal loan, as per the Central Bank of the UAE (CBUAE), is a loan that is given to individual customers, where repayments are made out of salary and end-of-service gratuity, and/or any other verifiable regular income from a well-defined source. When you have big purchases or expenses coming up, a personal loan can be a useful way to spread the cost. The process is simple: Borrow a fixed amount of money from a bank, then pay it back in agreed-upon instalments. In the UAE, most banks will charge you an interest amount on top of the loan. If you opt for Islamic personal finance, you will be charged a flat rate without any interest, or a Shariah-compliant profit rate. Rules and regulations The UAE has clear, transparent legislation when it comes to loans, and the rights of borrowers and banks. Here are regulations to be aware of, outlined by the CBUAE, before applying for a personal loan: The CBUAE has set the amount of the personal consumer loan at 20 times the salary or total income of the borrower. Banks and financial companies are under strict obligations to ensure this limit is not exceeded. Taking this rule into consideration, most banks will prescribe a limit on your personal loan based on your income and ability to repay. The repayment period for the loan must not exceed 48 months, as per CBUAE. The monthly deduction for such loans must not exceed 50% of the borrower’s gross salary. If the loan period extends to the borrower’s retirement age, banks and finance companies must schedule a reduction of the loan to allow a deduction of only 30% of the borrower’s income (or pension salary in the case of UAE citizens). Banks and finance companies may only take postdated cheques from the customer that cover the instalments, with a value not exceeding 120% of the value of the loan or debit balance. Banks are obliged to calculate and declare the interest rate charged on the loan, by determining the reducing balance of the loan on an annual basis. The conditions for granting personal loans must be included in a standard agreement by the bank, drafted in both Arabic and English, and written in an easily readable font, in accordance with texts drafted and approved by the Emirates Banks Association. What are the different types of personal loans? Personal loans in the UAE are structured differently, depending on how they are used. Salary transfer loan vs. non-salary transfer loan: A salary transfer loan is one in which, your repayments are made from the account your salary is paid into. A non-salary transfer loan is one where the payments come from a different account, called a payment account. The salary transfer loan is the most common type of personal loan in the UAE, and lending banks often offer lower interest rates and higher approval limits, with faster processing durations, if they host your salary account. Islamic personal finance: These are Shariah-compliant alternatives to conventional loans. Instead of charging interest (riba), they use concepts like Murabaha or Ijarah to finance personal loans. The applicant repays a predetermined fixed profit over the tenure of the loan. Here’s how Murabaha and Ijarah work: Murabaha : Instead of lending money, the bank buys an asset or commodity on your behalf and sells it to you at an agreed-upon fixed total price, which is the original cost plus the bank’s profit margin. If you require cash, the bank immediately sells the commodity in the market on your behalf, providing you with the funds you need – you will make the repayment based on agreed-upon deferred payment terms. With Murabaha, the profit rate or mark-up is fixed at the start and does not fluctuate. Ijarah : The bank purchases a specific service, like school tuition fees, or medical treatment, and then leases the right to use this service to you for a predetermined period. You would then pay regular, fixed instalments to the bank, instead of paying back a loan with interest. The bank maintains ownership of the asset or service agreement throughout the lease term. How do interest rates work? Conventional banks offer one of two interest rates, so it’s important to understand the difference before locking in. You can determine how much you would pay over the full duration of your personal loan, by understanding how the different interest rates work. Flat rate : A flat interest rate is calculated on the complete loan amount for the whole term, and it is set at the beginning of the period. It remains the same throughout the payment cycle, and doesn’t take into account that payments over time reduce the amount borrowed. Reducing interest rate : T