I lost my job in March of this year and have a personal loan and car finance from a local bank.
The personal loan is 129,000 Dh ($35,125) and the monthly payments are 4,000 Dh. The car loan was initially 76,000 Dh. I took out both loans less than a year ago.
Since losing my job, I have used my savings to pay the two loan installments each month to avoid any missed payments and bad credit.
The bank also froze Dh80,000 of my pension, which I had planned to put back into a retirement fund once I started working again.
I was hoping to find a job soon but unfortunately I haven’t found one yet, so I contacted the bank to help me reschedule my loans.
At first, the bank told me that the 80,000 Dh could not be paid on the loans and that I had to continue with the monthly payments.
I then made another request for the collection department to contact me and they told me that they would use the 80,000 Dh against the loans and then reschedule them.
But this solution does not help me because I cannot pay the monthly payments until I find a job. I also explained to them that I did not want to touch the money that was intended for my pension.
They refused my request and said there was nothing they could do and I had to borrow money from friends or family to cover what was owed.
I don’t want to have bad credit because I lost my job and can’t afford to make the payments right now.
I also want to apply for a mortgage to buy a house in the future and am worried about the long term effect this will have on my credit rating.
I’m trying to find the right way to do this. I want to know what my rights are and how I can solve this problem. Can you help me please? Facebook, Dubai
Debt Speaker 1: Steve Cronin, Founder of DeadSimpleSaving.com
Getting into debt can be manageable if you have a stable salary, but as you’ve seen, a loss of income can lead to many challenges.
When you have a personal loan, you put your finances in the hands of the bank. Such a loan is not secured by a specific asset such as a house or a car – it depends on you and your ability to generate income or pay from your savings.
It looks like you’ve burned through your savings, if you can’t make monthly payments. You have a car, however, you may be able to sell it.
A classic pitfall is that new cars lose value in the first two years much faster than the loan balance. So even if you sell the car, you might not receive Dhs 76,000.
If you can sell it for, say, Dh60,000, the bank must agree to add the remaining Dh16,000 to your personal loan, as the rest becomes unsecured debt once the car is sold.
It’s hard to imagine how you can prevent your pension money from being used to pay off part of your personal loan. I assume this is money you intended to invest in a pension, rather than a retirement plan.
If so, neither you nor the bank would be able to access it unless you are over retirement age.
If your personal loan was taken out over a three-year period, you pay around 7% of the declining rate (note, not the flat rate, which tends to be lower).
Seven percent is what you might expect to earn in the stock market over the long term, but that’s an aggressive projection for a pension.
So you’d probably be better off using the 80,000 Dh to pay off your debt anyway, then once you find a job, start saving hard to replenish your retirement pension.
You can’t do much without a job to pay off that debt, other than relying on help from others (you can always offer them a lower interest rate) or selling any assets you own.
Do whatever you can to find a job, even part-time. You can always change jobs once the debt is paid off.
Non-payment of three consecutive loan installments would be considered a default, which would in effect hurt your credit rating for at least five years.
Another avenue is to speak to a UAE charity for debt support. There are a number of them, such as Dirham Al Kair.
Beware, if you end up getting a large mortgage and find yourself out of a job again, you could, in theory, lose your home.
Your current challenge is a warning not to go into more debt than you can afford.
Don’t hide your problems out of embarrassment. Your friends and family can learn a valuable lesson from your situation, even if it hurts to be the one teaching them.
Debt 2 Panelist: Carol Glynn, Founder of Conscious Finance Coaching
I’m so sorry you lost your job and ended up in this situation, but kudos for keeping track of your monthly repayments all this time. This will help you in your negotiations with the bank.
It is unfortunate that the bank was not more helpful. Go in person to your bank’s branch and ask to speak to your relationship manager.
Bring proof of your previous payments and, if possible, bring proof of your attempts to find a job. Ask them to restructure your loan or possibly give you a repayment holiday while you continue your job search.
I would reconsider using pension money to pay your monthly payments in the short term.
This will protect your credit score, reduce your penalties and interest, and reduce pressure on your cash flow. You can focus on replenishing your pension fund when you start earning money again.
You can consider some options. If you sold your car, would that be enough to pay off your car loan? This would remove the burden of a loan.
Do you have other assets that you can sell and use the funds to pay off the loan until you find a new job?
Are there other sources of income that you can use? Consider applying for positions outside of your usual job description to increase your chances of finding a new job. Do you have any skills you can use to earn money part-time or freelance while you search for a full-time job?
I would also recommend analyzing your monthly expenses to make sure you are using the funds you have available most efficiently.
Failure to repay the debt on time and in full when due will affect your credit rating. However, when you find a new job, you can work to fix it by making sure you pay your dues on time and in full each month. Over time, your credit score will improve again.
The Debt Panel is a weekly column to help readers manage their debts more effectively. If you have a question for the panel, write to [email protected]
Updated: September 14, 2022, 5:00 a.m.