According to the Al Etihad Credit Bureau, 3.15 million UAE residents had debt in 2015, with most of them having more than one loan. People borrow money from banks for various reasons - to buy a new car, for emergency purposes or to buy their dream home.
But do you know that a loan can be either good or bad depending on how you decide to use it?
If a debt has the capability to generate rate of return higher than the interest paid, it is considered as good debt. Anything that drains your wealth is considered as bad debt. Below are loan types which can benefit you in the long run.
If you think you have a good business idea then applying for a business loan can pay off in the long run. Money borrowed for business equipment finance or working capital finance, business loans are all used towards creating an asset or increasing the potential for your business to grow. Using the right amount at the right time is what makes a difference in any business condition.
When investing in a property, the value is most likely to appreciate over time. And as the mortgage is paid off, your equity in the property will increase as well. However, making a real estate purchase requires high investment, so make sure to take a loan which you can comfortably repay in the future.
If you're a mortgage buyer, avoid the assumption that it's a quick way for making profit. In case the market slumps, value of your purchased property will also decline resulting in you being stuck with a financial liability that you can't pay off.
When applying for a mortgage make a well informed decision, do your research and compare mortgages in the UAE. On Souqalmal.com there are 67 home different home loans listed which can be filtered based on minimum salary requirement, loan duration and down payment. It also enables users to choose from Shariah-compliant loans or a loan for self-employed or non-listed companies employees.
An education loan is considered as an investment as it can help secure you or your children's future. Knowledge acquired through education is irreplaceable and can be achieved with the help of an education loan. It can later convert into higher earnings and better employment opportunities in the future
However, not all forms of debt are a good idea in the long run. Below are loan types which can drain your wealth if you aren't careful.
Personal loans for a lifestyle upgrade
Personal loans should be only considered if it's the only option to get cash for a necessity. Taking a personal loan in order to purchase insanely expensive things is a bad idea. Try compromising in other areas, which will not result in you taking a loan.
If you love to travel, choose a destination that is within your budget rather than going for an expensive holiday and spending the rest of the year making loan repayments. Start saving if you really want to go for an extravagant holiday.
Credit card debit
Debt acquired out of credit card usage is one of the most expensive forms of debt with steep interest rates that can go up to 40 per cent per annum. However, if you do have a credit card there are simple ways to make the most of their features and rewards without accumulating interest. Simply pay off the entire outstanding balance on the due date. It is recommended to make timely payments, which will not affect your personal finances in the long run and prevent you from spiralling into a debt cycle.
Car loan for an expensive car
A car is a depreciating asset. On average, a brand-new car loses 20 per cent of its value the moment it is out on the road. On top of this, the loan you take to finance your vehicle is given at an interest rate. This means you're already paying more for a car which is depreciating every day.
Another option is to invest in a second hand car which is lower in value. If you only want to buy a brand new car then look out for offers especially during the holy month of Ramadan. Dealers have offers on cars such as "0% finance on your car". Souqalmal.com offers 80 car loan options to choose from.
By Ambareen Musa
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