A Dubai resident didn’t expect that the Dh180,000 loan she took out during the pandemic would triple to Dh530,400 after accepting the bank’s offer to restructure her loan, extending the Equated Monthly Instalment (EMI) to 17 years. While extending loan tenure lowers the monthly payment stretches the repayment period, it can also lead to paying more interest and higher charges.
Devi, an Indian expat in her late 30s – who requested not to divulge her full name – is a former manager at a Dubai-based travel company. She was getting paid a monthly salary of Dh18,000 until she lost her job at the height of the pandemic.
Devi attempted to pay her EMIs from her savings while she still had 44 monthly instalments on her Dh180,000 loan. However, since she still had no income, she couldn’t keep up with her bills in Dubai, so she chose to return to her home country.
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Shortly after, she began receiving calls from collection agencies recommending her to use the debt deferment scheme imposed by the UAE Central Bank as part of Covid-19 relief efforts. She was told that she could put off her EMI payments for 12 months while she looked for a new job.
Devi went back to Dubai in 2022 and landed a new job, though with a 60 per cent pay cut. Upon updating her employment status with the bank – with her salary now reduced to Dh7,200 – she was presented with a restructured loan plan: An EMI of Dh2,600 – which is almost half of what she used to pay when her salary was Dh18,000 per month.
The loan tenure was also extended to 17 years. However, the prolonged payment consequently resulted in more interest charges over time and Devi’s payable amount totaled Dh530,400.
Understanding interests and charges
Extending loan tenure will make monthly payments lower. A longer loan term, however, means accumulating more interest charges. For example, a Dh10,000 loan with a 10% annual interest payable in four years will only cost Dh2,174 in interest and the total payment will be Dh12,174 at Dh254 per month.
Meanwhile if the payment is extended to 8 years – with similar 10% interest – the principal amount plus interest will become Dh14,567 at Dh152 per month. The longer repayment term makes the loan Dh2,393 more expensive. (Note: computations were made using loan term calculator).
Atty. Barney Almazar, director of the corporate-commercial department at Gulf Law, who was approached by Devi to review her case, told Khaleej Times: “The UAE Central Bank has established regulations to protect consumers from unfair banking practices. Banks are required to provide clear and complete information regarding loan terms and any changes to these terms, including deferments.”
Almazar emphasised “the need for financial institutions to provide transparent and comprehensive explanations of all terms to ensure clients fully understand the potential costs associated with their financial products.
“On the other hand, borrowers should also make sure they understand the terms and read the fine prints before accepting any contract or agreement,” he underscored.
What can Devi do?
Almazar said he is looking if the bank failed to adhere to the UAE Central Bank regulations. Devi, for her part, can file a formal complaint to the UAE Central Bank’s Consumer Protection Unit but she has first to gather evidence, including documentation of the bank’s lack of transparency and any unfair practices.
Legal remedies
Almazar said “there are legal remedies to rescind unconscionable repayment terms”. He shared the following measures when faced with extended loan terms and hidden charges:
- Engage a legal expert. Hire a financial dispute specialist to navigate the complaint process and protect your rights.
- Gather evidence. Collect all relevant documentation related to your loan deferment. This includes original loan agreements, any correspondence from the bank during the deferment period, and records of payments made.
- Request detailed statements. Contact your bank and request a detailed statement of your loan, including how interest and charges were calculated during the deferment period. Insist on clarity and transparency.
- Identify discrepancies. Carefully review the statements and compare them with the original loan agreement. Look for discrepancies in interest rates, charges, and repayment terms.
- Challenge the bank’s claim. If there is no formal contract or agreement documenting the deferment terms, UAE laws require any changes in the contractual terms to be mutually agreed upon by the parties to be legally binding.
- Highlight vitiated (impaired) consent. This applies if you agreed to extend your loan term, accepted a very high interest rate out of fear or coercion from collection agents, or were misled. These are considered unfair practices and grounds to rescind the contract.
- Provide evidence, including documentation of the bank’s lack of transparency and any unfair practices.
- File a formal complaint. Submit a complaint to the UAE Central Bank’s Consumer Protection Unit.