Caught in the UAE debt trap? Here’s how to escape

There is a debt epidemic in the UAE – writes Ben Flanagan – and for many new residents the temptation to go ‘into the red’ starts on the very first day they arrive.

Average UAE household debt is estimated at an astronomical $95,000, with almost half of residents saying their monthly income is insufficient to cover repayments, according to a 2013 study by Strategic Analysis.

And the number of personal loans increased by 10 percent since the beginning of 2015, despite some saying the newly launched Al Etihad Credit Bureau would restrict the market.

Preeti Bhambri, founder of personal finance website, points out that debt is something that starts early on for many newcomers to the UAE. When applying for a bank account or car loan, residents are often automatically issued with a credit card – one of the most expensive ways to borrow money.

“Newcomers to UAE often end up with credit card debt,” said Bhambri. “Debt is as big a problem in UAE as in any other country.”

For some, this first credit card leads to a spiral of debt that leaves them unable to meet repayments – putting some at risk of jail time. One newspaper recently carried a report about an Indian expatriate who had ran up a staggering Dh327,000 in debt in less than 18 months – and was left with just Dh500 a month to live on.

Read the September issue of Benchmark Middle East here

The newly launched Al Etihad Credit Bureau is intended to help protect residents from financial calamity, by allowing banks to make checks on individuals’ credit histories in making decisions on whether to lend.

But with that system still in its infancy, and there are few support mechanisms available to those already heavily indebted, said Ms Bhambri. “Another big issue in the country is that there are no debt-consolidation services available, barring a limited one offered by two banks,” she said.

So how do you get out of debt once there?

Ms Bhambri said the first step should be to move to cheaper finance options. Credit card borrowing is notoriously expensive, so taking out a cheaper personal loan to pay off your balance is one way of saving money. And switching from high-interest personal loans to cheaper loans can also help residents pay less interest, she added.

But Andrew Prince, financial planner for Acuma independent financial advice in Dubai, sounded a note of caution for those consolidating their loans in this way. A highly disciplined approached is needed to avoid slipping further into debt, he said.

“A minority who live for now, consolidate loans and then start again will experience what I refer to as a vicious circle – meaning that they use debt to repay debt,” said Mr Prince.

“Think carefully before consolidating loans, for whilst it may temporarily reduce your monthly outgoings, the amount charged for credit is usually higher the longer the loan term.”

Credit checks facilitated by the Al Etihad Credit Bureau should eventually help reduce the danger of people going into a debt spiral, Mr Prince said. In the meantime, the first move for those in trouble should be to speak to their lender, he said.

“For more serious cases of debt seek the services of a debt counsellor – they will have experience in how to help and who to turn to,” he said. “The internet will help you find someone or ask your friends, they too may have experienced similar difficulties.”

Not splashing the cash on overly lavish UAE lifestyles is another key tip offered by Mr Prince.

“As Oscar Wilde said, ‘I can resist everything except temptation’… It does take a lot of willpower to say ‘no’ to the latest fads and fashion, especially with little by way of direct taxation to worry about,” he said.

“The key message is to deduct at least 20 percent of your salary for savings before committing to a certain lifestyle [or buying the] latest ‘must have’… That way, you will have cash to purchase should you wish, or at least have a nest egg when ultimately returning home.”

So is the smartest thing to rip up that credit card issued when you first arrive? Not necessarily: there are ways credit cards can be financially beneficial to UAE expats (see panel).

“The smart people are the ones who use debt to their advantage,” said Mr Prince.

“I have a client fortunate enough to save a significant amount each month via their credit card, clearing the outstanding balance each month to avoid paying charges, but accruing enough air miles to fly business class every couple of months. Now that is smart.”