How NOT to be ripped-off while taking a loan

Usually, for every new entrant in Dubai - i.e. one who has got an employment, got an accomodation and a bank account - applying for a personal / car loan is the 2nd most important step towards settling down.All the banks - esp. the MNC banks - know about this quite as well , and are sitting there just to grab you to make a kill! Most often the rate is the currently applicable rate in the country - but offers / add-ons / ripp-offs are all dependent upon who proves the smartest - the bank or you .

This post is all about making you the smarter (well that's how I feel - I might be mistaken).

1) Don't jump on to the very first "lucrative" offer, which is often linked with your credit card - These loans prove to be extremely costly - you tend to pay an extremely high rate of interest if you're not a good personal finance manager!

2) Look for at least 5-6 offers of local as well as MNC banks - Often quoted rates and benefits are better in case of local banks, since the govt. favors these banks to a large extent to make them grow.

3) Look for the "Interest Rate on Reducing Principal" rather than "Simple / Flat Rate" - Regardless of the simple flat rates quoted to you, the former is the process followed by every bank, not only in Dubai, but internationally. This falls under banking process. Hence look for the lowest applicable rate on reducing principal amount.

4) Look for the hidden fees - Often banks say there's zero processing fees. However, they might name it differently, saying that you' have to pay just X% as documentation charges. Clarify what other charges are applicable - esp. in case of banks which tend to offer easy loans and goodies.

5) Try to pay processing / documentation / other charges separately - Often banks are known to be notorious in adding up these charges into the principal, and then apply the interest while calculating the EMI. Logically, I don't see a reason why a customer should pay interests on these at all!!! Usually this charge ranges from 0.5 to 3%. A loan amount of AED 100,000 would therefore have a documentation fee of only AED 3000! If your flat rate is 8%, you'd keep on paying at the rate of AED 10 per month for the whole period of your payment plan - which is attrocious Hence, if you can, delay the first instalment of your EMI, but pay these "hidden" charges separately.

6) Look for the "Early settlement fees" - Often banks tend to have a high rate for early settlement - just to discourage a client to settle accounts earlier than the total period. Usually when a loan is approved and given, the interests charges on monthly basis serve as constant monthly incomes for the banks, which they don't want to let go.

7) Finally, Decide well on your type of loan - When you are new to this country, you might feel cautious not to get into a debt which you cannot handle. While it's necessary to have a car, the same could prove a liability a few months later, if (God Forbid) either you or company decides to let go / move on. If you're very confident of staying the whole period of your payback period in the country, then a Car loan to buy a car proves cheaper. If you feel you might not stay the full period, then a personal loan for the same amount would be helpful.

No one wants to buy a used car with EMI linked to it. Nor you can sell a car with a loan attached to it (practically the car is owned by the bank, not you) The bank too charges an extra fee (other than the Early settlement fee) in case of Car loans when you ask for settlement. A personal loan can be settled early at your own pace, which can be used intelligently in early settlement.

Lastly, you should consult a finance person to check and recheck if the EMI you are paying correctly recalculates the principal you were promised. I was quoted a flat rate of 3.95% on a car loan, with no processing fee. It was after many months I realized that finally, I'm paying 4.33% flat rate. By that time it was too late and all papers I signed, intelligently avoided mention of these finer aspects. Therefore, do find a way to cross check this!! (If you need a reckoner contact me)

Hope after reading the above, you would be doubly careful before taking a loan.
(Photo Courtesy) This blog spot does not have any relation to the photo source.