A Simple Guide to Borrowing Wisely
At CBI, we know that borrowing can be a necessary part of achieving your financial goals. Whether you’re taking out a home loan, an auto loan, or funding another important goal, borrowing wisely helps maintain long-term financial stability.
Here are a few key points to consider:
- Compare loan options: Before committing, take the time to compare different loan options. Evaluate the interest rates, repayment terms, and any associated fees. A little research can help you find the most suitable option for your needs.
- Understand interest rates: Interest rates significantly affect the amount you’ll repay. Loans with lower interest rates are usually more affordable in the long run. However, always check whether the rate is fixed or variable, as this will influence your repayment costs.
- Review repayment terms: Planning ahead is essential. Make sure to include your loan repayments in your monthly budget. For your convenience and to avoid late fees, set up automatic payments.
- Avoid overborrowing: Before borrowing, take a close look at your income, expenses and existing debts. Only borrow what you need and what you can comfortably afford to repay.
To support you further, we’ve put together some FAQs you might find helpful when exploring your borrowing options.
What is an Equated Monthly Instalment (EMI)? An EMI is a fixed payment that you make to the lender e.g., a bank, on a set date each month. EMIs cover both the principal loan amount and the interest. EMIs are structured so that the loan will be completely paid off over a set period of time.
What is Debt Burden Ratio (DBR)? A DBR helps to measure if you can comfortably manage your monthly payments and repay debts. It’s calculated by dividing your monthly recurring total debt (including all EMIs and 5% of your total credit card limit) by your gross monthly income. It’s given as a percentage and in the UAE, DBR is capped at 50% to ensure you don’t borrow more than you can afford.
What is a credit report? A credit report shows your borrowing and repayment history, helping lenders decide if you’re likely to repay a loan, i.e., your credit-worthiness. It can affect the interest rate and terms of loans you’re offered. In the UAE, this information is collected by Al Etihad Credit Bureau (AECB) from banks and other financial organisations. Lenders may check your report when you apply for credit, so it’s a good idea to review it yourself beforehand.
What is risk-based pricing? Risk-based pricing means lenders offer different interest rates to different people based on how they've handled money in the past. If you have a strong repayment history, you’re more likely to get a preferential lower rate compared to someone who has missed payments in the past.
What is a deferment? A deferment is when you’re able to postpone your EMI payments by a set period of time. Most commonly, you can postpone a maximum of two instalments in a year and usually, these cannot be in two consecutive months. It’s important to note that there are often fees associated with deferred payments.
What’s an early settlement fee? An early settlement fee is a charge you pay if you pay off your loan before the agreed time. It’s usually about 1% of what you still owe, but the exact amount can vary depending on loan type.
What’s the difference between flat rates vs. reducing rates? A flat interest rate charges interest on the full loan amount for the entire loan term; it does not take account for how much you’ve already paid. On the other hand, a reducing interest rate is calculated every month on the remaining loan balance which means your interest decreases as you repay the loan. Flat rates often seem lower at first glance but can end up costing more. To compare, multiply the flat rate by 1.8% to get an equivalent reducing rate.
What is credit life insurance? Credit life insurance is a one-time payment that you can make that protects both you and the bank by covering your loan if something unexpected happens to you during the loan term.
Borrowing doesn’t have to be overwhelming. By carefully considering all these factors, you can make informed decisions that align well with your financial goals.
