Taking Out a Personal Loan for Government Employees in the UAE
Being employed by the UAE government brings with it many benefits. One of the most notable is the shorter prescribed working hours. Another is the stability of a public sector post.
Public sector employees are also sure to appreciate that UAE banks, credit organisations, and other financial institutions such as banks often have a specialised program that provides a personal loan for government employees.
What Is a Personal Loan?
According to the UAE Central Bank, a personal loan is a loan for individuals who intend to repay the loan out of their salary, end of service indemnity, or any other verifiable regular income.
Friends, Personal loans for government employees are a type of personal loan designed specifically for those employed by the government or government agencies.
Personal Loan Limits
Personal loans have set limits. Specifically, a borrower cannot borrow an amount that is more than 20 times his monthly salary or total (verifiable) monthly income.
After all, personal loans are essentially unsecured loans or non-collateral loans.
Personal Loan Term
Personal loans are primarily short-term loans. Thus, their repayment period cannot exceed 48 months or four years.
Personal Loan Amortisation
One repays personal loans in monthly instalments or amortisations. However, the monthly debt burden should not exceed 50% of the monthly salary/income. This debt burden should be even lower, at 30%, in the case of pensioners or those whose loan repayments are coming from a monthly pension.
Factors Affecting the Terms of Your Personal Loan
The UAE Central Bank regulates the maximum loanable amount, the maximum allowable monthly debt burden ratio, and the maximum repayment term of a personal loan.
However, banks, credit organisations, and other financial institutions have discretion over the specific terms they will offer every customer. Specifically, a financial institution will assess you against various criteria before deciding:
- Whether or not to lend you money
- How much money to lend you
- How much interest to charge you
- What repayment terms to offer you
- How soon they will release the funds to you
The following are a few of the most common criteria financial institutions use in assessing would-be borrowers:
Credit Score
Your credit score tells a financial institution, at a glance, about your ability and propensity to pay back what you owe.
The credit score is part of a credit report. The Al Etihad Credit Bureau, which the federal government owns, generates credit reports in the UAE.
Credit reports summarise information from various sources, including financial institutions, telecommunication companies, utility companies, and the like. The law requires the said sources to provide the credit bureau information on their customers and clients every month.
When a financial institution receives your loan application, it will look at your credit report, specifically your credit score, and use that as one of the bases for granting or denying your loan application.
Monthly Salary
Personal loans are non-collateral loans. Therefore, financial institutions grant personal loans only when they are reasonably sure of getting paid.
As such, financial institutions prefer to offer them to salaried individuals such as public and private sector employees or those with a verifiable source of monthly income.
And the higher your monthly salary or verifiable monthly income is, the higher your chances are of getting approved for a personal loan.
Existing Debt Burden Ratio
If you have existing loans or debts, the financial institution will also look at what portion of your salary goes towards loan servicing.
As earlier mentioned, the UAE Central Bank stipulates that the debt burden of any individual must not exceed 50% of his monthly salary or income (or 30%, in the case of pensioners).
Thus, if 50% of your salary goes to repay some other debt or loan, then the financial institution is unlikely to grant your personal loan application.
Now, if you are using 25% of your salary to pay for loans and debts, then your personal loan application may be approved, subject to other considerations. But even then, you may be unable to get the maximum allowable amount.
As a general rule, the financial institution you are borrowing money from must ensure that they will lend you only up to the amount that will keep you within the maximum debt burden ratio of 50%.
Considerations When Taking Out a Personal Loan
Many financial institutions have specialised personal loan programs for government employees. Before you commit to a particular offer, do remember to compare the offers you will receive.
Use the following checklist to assess which financial institution is offering you the best loan terms:
- How Much Are You Allowed to Borrow?
The higher the allowed amount, the better. You may, of course, choose not to borrow the maximum amount on offer. But it would be nice to have the option to choose.
- What Is Your Repayment Period?
The longer it is, the better. While you may choose not to opt for the maximum repayment period, it is nice to have a choice.
- What is Their Processing and Approval Timeframe?
The faster it is, the better.
- Does It Have a Life Insurance Component?
It is better if it includes life insurance. If something happens to the borrower, this protects his family from having to pay his outstanding debts.
What Is the Interest Rate?
Note that your personal loan may have either a fixed or a reducing balance interest rate. You save more money with a reducing balance interest rate than with a fixed interest rate.
In a loan with a reducing balance interest rate, the interest amount you pay on an instalment is calculated based on that month’s outstanding balance (i.e., the principal diminished by any amount paid towards it) rather than the principal or the face value of the loan.
- What Are the Documentation Requirements?
Of course, the fewer requirements, the better. A salary transfer letter is a minimum requirement. Other standard requirements are the application form and loan agreement, national ID, passport, and bank statements.
- What Are the Loan Fees?
Aside from the interest rate, financial institutions usually charge a flat-rate processing fee, early settlement fees, loan cancellation fees, as well as late payment fees. Compare your options to find out which bank or lender charges the least amount of fees.
Take Advantage of Personal Loans If You Are a Government Employee
Having a government post in the UAE has many advantages, and one of these is the personal loan available to government employees.
A government employee can use a personal loan to cover emergency expenses and address cash flow shortages.
A personal loan is also a way to leverage future salaries to finance ventures that can generate revenues or increase future income. You can borrow money to use as business capital. You can also use its proceeds on personal development and upskilling activities (for example, taking a Six Sigma Certification course).
Personal loans are likewise a debt consolidation tool. Let’s say that your credit card debt is getting out of hand. You can pay off your credit card from the proceeds of a personal loan, thereby stopping default penalties while converting your debt into something more manageable.
Debt consolidation through a personal loan is also a good strategy if you are stuck with a high, flat interest rate on another loan. Through a personal loan with a reducing rate, you can reduce your monthly interest payments.