A personal loan is a great financial tool that you can use for life's big ticket items; a car, a wedding, to furnish a nursery or go on a dream holiday, but when loans are on offer, it's easy to lose perspective of the things that matter and blur the line between what you want and what you need.
The latest research by the Community Development Authority (CDA) into the Dubai lifestyle showed that since 2011 there has been a 6.2% increase in the numbers of people who have taken on more debt that they can afford to repay.
For that minority, debt is a stressful and serious problem that could lead to a criminal record or custodial sentence.
To be one of the majority who enjoy the benefits of a personal loan, it's vital that you do the math.
There are three crucial calculations to make:
How much do you need to borrow?
Whether you need to buy a car, build a house or pay for a wedding, work out the most cost-efficient or cheapest way of doing so before applying for a loan.
A beautiful, high-performance, 4×4 vehicle might catch your eye on a forecourt, but for new vehicles the "depreciation rate in Dubai can be as high as 30 percent" and unless you plan on keeping it for a very long time, you're unlikely to recoup your investment.
If you're borrowing money to buy a vehicle or anything else, calculate its long-term value and work out whether you'd be better off buying something pre-owned.
How much can you borrow?
All lenders have certain criteria that loan applicants need to meet before they can approve the release of any funds.
In the UAE, all banks abide by Central Bank rulings that any loan or other debt repayments must not exceed 50% of an individual's monthly income. This is known as your Debt Burden Ratio (DBR).
Any lender will look at how much you want to borrow vs. your income and debt expenditure to assess your application. To find out whether you're eligible for the amount you want to borrow, you can calculate the monthly repayments online using a bank loan calculator.
Reputable lenders usually have a loan calculator facility on their website, but you can compare your eligibility and repayment amounts on an impartial comparison site like Bayzat.
How much will it cost you to borrow?
Competition between banks for your business means that this is quite a good time to borrow money in the UAE.
However, although personal loan incentives such as prize draws, quick processing times, gadgets and shopping vouchers make a loan seem attractive, the only incentive really worth checking out is the interest.
There are usually two main options: a reducing rate or a flat one.
A reducing rate is higher than a flat rate, but is calculated on the amount you actually owe so as the debt is repaid, the interest repayments decrease to reflect the reducing balance. Flat rate repayments remain the same for the duration of the loan period.
Understanding the difference between the two could save you thousands over the duration of your loan so weigh up your options carefully.
The golden rule to borrowing is to always do the math: know what you need to borrow, how much a lender will give you and what it will cost you in the long-term before signing up to make sure that you enjoy the all benefits of a personal loan and none of the unnecessary debt.