Importance of borrowing responsibly

One way of working out how much debt you're able to take on is by calculating your 'debt-burden ratio'

The uae's cabinet recently announced a new draft law on bankruptcy, and though we haven't heard many details about it, we do know that it won't protect private individuals from jail if they fail to keep up loan or credit card payments. This may surprise you, given the way that the draft law was initially covered - as if there was suddenly no downside to taking on debt and that everyone could go about securing as much credit as they wanted.
In reality, the draft law won't affect private individuals, meaning that, as ever, you're encouraged to borrow responsibly. We all know the pitfalls associated with taking on debt in the UAE - including the possibility of jail time if you don't keep on top of your repayments. And, a new draft law or not, the advice on navigating those pitfalls remains the same.
The bottom line is you should always ensure that, if you take on debt, you're able to pay it back under the terms agreed with your bank. One way of working out how much debt you're able to take on is by calculating your 'debt-burden ratio'. This is the amount of monthly debt repayments you have going out, divided by your gross monthly salary. So, for example, if you earn Dh20,000 per month, but you have to spend Dh10,000 per month on debt repayments, your debt-burden ratio is 50 per cent.
Now, according to the UAE Central Bank's regulations, your monthly debt-burden ratio cannot exceed 50 per cent. That regulation was introduced in 2011 and came as a welcome guideline on how much people should be allowed to borrow.
In practice this means that, if you have a credit card with a Dh20,000 limit, and you want to take out a loan, the lender will likely view your monthly liability as five per cent of the credit card's limit - so Dh1,000. That's not too bad if you're on a Dh10,000 salary, but if the loan you want to take out involves repayments of Dh5,000 per month, the lender will have to refuse because your monthly debt-burden ratio would be 60 per cent - 10 per cent higher than the legal limit.
You're forced by that limit to stick to a monthly ratio of 50 per cent, but we always encourage borrowers to err on the side of caution by setting themselves a limit closer to 40 per cent. After all, unexpected circumstances can come up, and when half of your monthly salary is being wiped out by debt payments, it can be difficult to deal with them
By using compareit4me.com, you can compare an enormous range of different loan options, making it easier to stick to your monthly debt-burden ratio target. Everyone's circumstances are different, so if you do decide to take on new debt, spend some time comparing repayment schemes to work out the best fit for your financial situation.
There's no doubt that the UAE is taking great steps towards making banking safer and easier for everyone. But with the new draft law on bankruptcy only targeting business owners, a private individual would do well to carry on as usual.
The writer is CEO of compareit4me.com. Views ?expressed by him are his own and do not reflect ?the newspaper's policy.