The Debt Panel: 'Fighting off creditors on my Dh245,000 debts is becoming a losing battle"

I work in Abu Dhabi earning Dh15,000. I took a salary advance from my employer for my house renewal, equivalent to one month's pay, so currently I receive Dh13,750 a month. In total I owe almost Dh245,000.

My monthly liabilities are:

Monthly payment / total outstanding

Loan 1 Dh2,240 / Dh11,173 (This has a maturity date of April 2018)

Loan 2: Dh2,554 / Dh35,766 (This has a maturity date of January 2019)

Loan 3: Dh3,719 / Dh133,884 (payable for 60 months with 36 months remaining)

Credit Card: Outstanding balance of Dh62,000

Total owed: Dh242,823

Two months ago, there was a family emergency and I had to fly back home. My salary was given to me in advance and I ensured the loans were paid. Unfortunately, this meant I missed the card payment. I was already behind by one month. The card company sent me a legal letter in December stating that my security cheque will be presented but I managed to take care of the missed payment. When my salary came, I had to withdraw all the money before the payments for  loans 1 and 2 - which I borrowed from the bank my salary is credited to - could be withdrawn to pay for the credit card. That left me with just enough funds to pay for loan 3 and other expenses. Now, I have received a notice from the bank regarding the missed payments on loans 1 and 2. This was the first time I missed them.

I've been trying to find a way to either consolidate my payments or lengthen the tenure with applicable interest for loans 1 and 2. Unfortunately, my company is not listed so the bank cannot give me financing or explore the option of combining my loans even though my salary has increased since I took the financing.

Loan 3 has been converted from a credit card debt but I feel I have been shortchanged due to the high interest rates. The bank gave me a loan against the then card balance of Dh90,496. and I agreed to pay Dh3,719 monthly for five years for a total amount of Dh223,140, which multiplies my debt almost two and half times.

I don't want to run away from my debts; I just need time to come up with the money to pay my dues. I am holding on to the hope that salary increases and bonuses are in my company's foreseeable future. I need advice on how to manage these debts, without using debt consolidation companies, as they have been unhelpful in the past. LG, Abu Dhabi 

Debt panellist 1: Philip King, the head of retail banking at Abu Dhabi Islamic Bank

Your commitment to pay off your outstanding debt before it spirals out of control is the correct decision. Currently, your monthly loan repayments total just over Dh8,500, although it is your card debt that should be of most concern. Cards typically charge higher rates than personal loans, so tackling this debt should be your priority. Missing card payments or just paying the minimum due each month will result in additional punitive charges while you won’t reduce the total amount owed. If you were struggling to make a repayment, the best option would be to check whether you could defer a loan payment for a month, giving the bank advanced notice of your intention.

You should also speak to your bank about consolidating your outstanding debt into a single loan. I know you have already attempted this, but if a single bank holds all your loans, and this is where your salary is paid, it is worth discussing your options with them again. They will want to receive a clear picture of your financial position and to be sure that you will be able to make repayments consistently and on time. You can help reassure them of this by drafting a considered financial plan which sets our your proposed path to become debt free.

At the same time, and where possible, you should aim to reduce your living expenses. Although your focus should be to rid yourself of your card debt, you will pay off loan 1 in a few months and loan 2 early next year, leaving you with a manageable loan repayment of Dh3,719 a month. You could then use your salary increases and bonuses to pay loan 3 off early, although it is unwise to bank on future windfalls when making your financial plans.

In summary, your priority should be reducing your card debt, either through a consolidating loan or by committing a higher percentage of your salary to this. If you also reduce your living expenses to support a sustainable programme of repayments, you will soon be living debt free.

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Debt panellist 2: Keren Bobker, an independent financial adviser with Holborn Assets

While your total monthly repayments are Dh8,513 on the loans with further unspecified payments on the credit card, one of the loans is due to be repaid in April of this year so will shortly no longer be relevant, reducing the loan repayments to Dh6,273. I expect the reduction in fixed outgoings by Dh2,240 will reduce the pressure each month.

It is important that monthly loan repayments, and the minimum payments on the credit card, are always met or your credit record will worsen. This record at the Al Etihad Credit Bureau is affected by missed and late payment and is one of the main determinants when banks consider lending to an individual. As there have been issues with payments in the past, this is likely to have increased the rate of interest on the last loan. The longer it takes to repay a debt, the more interest you will pay.

The interest rate on a credit card will be higher than for a personal loan and making the minimum payment is just paying off the interest. The total payable by not consolidating a credit card is likely to be higher than the payments on the loan but debtors don’t factor this in.

Because you have built up a significant amount of debt in comparison to your income, stop using the credit card and focus on the repayments. On an income of Dh13,750, under Central Bank of the UAE rules, the maximum monthly debt repayments should be no more than Dh6,875. As your payments from April will reduce, you will then be under the limit. If the gross income of Dh15,000 is used, 50 per cent of this is Dh7,500 so there may be some leeway to restructure borrowing to reduce the total monthly payments. Speak to your bank again and please avoid companies that offer loans at higher rates than the banks.

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Debt panellist 3: Steve Cronin, the founder of Wiseuae.com, a non-profit community for expat investors

Getting through this is challenging but doable. You must stay disciplined, communicate regularly with the banks and use whatever support you can find. Talk to multiple banks and card providers in case you can move balances around.

Track everything in Excel with a daily cash flow, so you know what is going in or out when. If you are going to miss a payment, make sure you and the banks both know in advance.

Income

Maximise what money you have available first. Ask a friend or family for a loan so you can pay down as much of your debt as possible. Check if you have anything to sell – old furniture, jewellery etc. Use whatever talents you have – offer your services at the weekend at fiverr.com or upwork.com, even if it is admin work.

See if you can get another salary advance or a pay rise. You may even want to consider moving to a company that is listed with the banks, as this will reduce your interest rates significantly.

Track and minimise all expenses, including rent, transport, food and clothes. Any extra money should go straight to paying off your debts.

Debt

Loan 1 is nearly finished. Make sure you can stick it out until April and pay it off. Once it is gone, some of the pressure will ease. Avoid lengthening loans 1 and 2, unless you can increase them to pay off some of loan 3 or your card balance.

Your most toxic debt is the credit card balance and loan 3. You must try to pay these off as fast as possible, without sacrificing any minimum payments. See if you can transfer the balance of your credit card to a new card with a zero per cent balance transfer offer. This will give you some breathing space. If not, you must try to reduce the Dh62,000 by at least 3 to 4 per cent per month, otherwise you will never clear it. Avoid taking cash off the card to make payments on your other loans. Ideally stop using the card completely – you cannot afford for your card balance to increase.

The annual interest rate on loan 3 seems to be above 40 per cent, which is astonishingly high. That bank may agree to a much lower rate and even to take on the debt from the other loans if you transfer your salary. Otherwise a different bank altogether may be prepared to take on the debt. Failing this, aim to pay off loan 3 faster once loans 1 and 2 run off.

The Debt Panel is a weekly online column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae