Whether we are trying to buy our dream home or our next car, do we have enough financial knowledge to make the right choice?
Do you know that over 40 percent of UAE’s residents don’t know the difference between reducing and flat rate? – A key factor to consider when choosing a loan. These insights were revealed in our recent survey on personal finance.
Being educated vs. being financially aware
Majority of UAE’s residents hold a college degree with over 70 percent of survey respondents held at least a Bachelor’s Degree. But is being educated the same as being financially aware?
According to our recent survey, 2 in 3 UAE nationals confessed to not knowing the difference between reducing rate and flat rate.
Comparing reducing rates and flat rates on the same scale, is similar to comparing apples to oranges. This is because flat rate calculates interest/profit on the whole loan amount, while reducing rate takes into account the amount already paid off and only calculates interest/profit on the outstanding loan balance. And if you don’t know the difference, you could end up choosing a more expensive loan!
[Related: Flat rate or reducing balance: 18% could be more expensive than 24%]
The rate on your loan will determine your total debt obligation, and as a potential borrower, it is crucial for you to know how much you owe in debt. The Debt Burden Ratio calculates how much of your income is spent on repaying debt, and also assesses your future eligibility for a loan.
The UAE Central Bank has mandated that the DBR (Debt Burden Ratio) for borrowers in the UAE cannot exceed 50 percent. So assuming that you have a monthly salary of AED 20,000, you cannot be paying more than AED 10,000 per month in loan repayments.
Compare over 240 credit cards, 95 personal loans and 70 mortgage products in the UAE.
Who do you turn to for financial advice?
Let’s say you’re looking to finance a new house, your next car or even a holiday. Who would you trust to give you the best financial advice on the matter?
Based on our survey, 38 percent of UAE residents admitted to asking their friends and family for advice. In sharp contrast to this, only 9 percent said they would go to banks, and 7 percent to financial advisers. This gap highlights a huge opportunity for banks to enhance their role as a trusted financial adviser in the UAE.
Over 1 in 4 expats and almost half of UAE nationals looked for financial advice online. In a country where over 90 percent of the residents are active internet users, could the internet emerge as the most important tool in disseminating financial guidance?
A love-hate relationship with credit cards
Over 65 percent of the respondents owned a credit card, but cash still reigns as the preferred mode of payment in the UAE. Cash is a clear winner amongst nationals, with over 85 percent preferring cash to credit cards. The survey also revealed that over 35 percent of nationals used their credit cards to withdraw cash from ATM’s, which is surprising since most banks in the UAE charge a high cash advance fee of around three percent of the amount withdrawn.
Most credit cardholders used credit cards for making regular store purchases (73 percent), while a mere 10 percent used their cards for online shopping, which draws attention to security concerns that most people associate with the use of credit cards over the internet. One in four residents who don’t own a credit card, don’t feel that credit cards are safe.
[Related: How can you save on comparing credit cards? | 67% of credit cards are for salaries under AED 10,000]