Should you risk your nest-egg for a loan?

DEBT is a fact of life. Whether for a personal loan, credit card or mortgage, you’ll do well not to have to ask a bank for a loan at some point in your life.

And now you can take out a personal loan secured against your severance pay – a gratuity that is received by all UAE employees when they leave their jobs and that many people see as a nice little nest-egg. But is it a good idea? cashy investigates...

Severance pay explained

All UAE employees are entitled to severance pay, also known as 'end of service benefit' (EOSB), after completing one year of continuous service for their employer.

For the first five years of employment, severance pay is calculated at 21-days' remuneration for each year of continuous service completed. For each additional year thereafter, it's calculated at 30 days' remuneration. The total is capped at two years' salary.

New personal loan

Emirates NBD will consider giving the new loan to any current account customer with a salary of more than AED 5,000 ($1,361) being paid into their bank account each month.

You'll only be eligible if you sign a contractual agreement between the bank, your employer and yourself. This stipulates that the monthly repayments are automatically taken out of your salary when it is paid into your Emirates NBD bank account.

If you lost your job, you'd default on the loan. The contract stipulates that, in that event, the bank will have recourse to your EOSB, which will be used to clear the remaining debt.

You can borrow up to 90% of the EOSB you have accrued to date – before you leave your job and receive the money – starting at AED 10,000 ($2,722). The current interest rate on the loan, set until the end of this month, is 10.99%.

Interest and capital repayments are calculated so that your EOSB will never be less than the amount outstanding – so you can't wind up owing more than your severance pay entitlement.

Shekhar Krishnamurthy, head of retail assets and liabilities at Emirates NBD, believes the loan is an "innovative solution" for those struggling financially: banks are often unwilling to lend to these people, especially in the current economic environment.

He says: "The EOSB-backed personal loan operates just like a normal personal loan with repayment in the form of monthly instalments.

"The EOSB amount remains as collateral and is an eligibility criteria for approval of the loan."

Know the risks

Rupert Connor, a senior financial consultant at Acuma Wealth Management, advises people to be cautious when taking on debt in the UAE, especially when using their EOSB as security.

"We don't encourage anyone to get into debt for a number of reasons," he says. "My advice is: if you can't afford something, don't do it. Only in extreme cases consider this type of loan."

If you're still thinking about taking out a personal loan against your severance pay, there are a few factors to consider:

• The loan is aimed at those in the medium and lower salary bracket. Ensure you understand the small-print and will be able to stick to the terms of the repayment plan.
• The EOSB is only used as security against your loan. So you do have to pay the loan back – with interest. It’s not an advance of your EOSB.
• If you lose or change your job, your EOSB becomes payable. In both situations, the EOSB would be used to close the loan. Depending on the size of the loan, this could mean losing your 'nest-egg'.
• Be wary that if you lose your job because you have breached the terms of your employment contract, you’re unlikely to qualify for an EOSB at all. In this instance you would be unemployed and saddled with debt.
• Defaulting on debt in the UAE can have severe consequences, if not rectified quickly. Imprisonment is not uncommon. Expats might also be restricted from leaving the country until their debts are cleared.

If you're struggling with debt, cashy's article on consolidating your debts is here to help.

Pic credit: Catherine Hadler/ FreeDigitalPhotos.net

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