Should you take a personal loan for furnishings?

Many of us have realized the importance of our home spaces over the past year. Extended periods of time within our homes have prompted many UAE residents to rethink their interiors. But whether it’s a refurbishment project or redesigned indoor and outdoor living spaces, chances are you’re likely to need extra cash to realize your dream home.

A small loan, typically available as a personal loan in the UAE, can help fund the purchase of new furniture or white goods, such as a bedroom suite or new kitchen appliances.

How do personal loans in the UAE work?

Such loans allow you to borrow a fixed amount of money for a set period of time, which is paid back with interest in monthly instalments. Such loans are typically unsecured, meaning they do not require any collateral.

Personal loans in the UAE are relatively easy to obtain, with most banks only requiring a copy of your Emirates ID and copies of recent bank account statements. Since they are unsecured, loan amounts aren’t as high as other kinds of finance, such as home mortgages.

Taking out a personal loan in the UAE can help bridge an immediate shortfall of funds, but there are several pros and cons to consider before making the decision to take on extra credit. Central Bank rules determine who is eligible for a personal loan in the UAE. Additionally, existing Debt Burden Ratio rules specify (for both expats and locals) that the combined monthly instalments on all your loans and credit cards should not exceed 50 per cent of your salary. So, while loans can pay for big-ticket items, they must be considered within your overall financial situation.

(Please note that every applicant is eligible for a different amount and that’s based on their credit score, monthly income, and debt ratio etc.).

It’s helpful to understand what the loan costs – in other words, the kind of interest you’ll be paying, no matter what you use the loan for.

There are two ways of calculating interest rates for personal loans:

First is a flat interest rate which calculates the interest rate based on the full loan amount and does not vary over the loan tenor/ period. Flat interest rate is not allowed for financial institutions under the local regulations.

The other type is the reducing interest rate. It calculates the interest rate of the personal loan based on the outstanding principal amount. So, the interest rate decreases over the loan tenor. This method of interest calculation is permissible for financial institutions.

Advantages and disadvantages of loans for furniture in the UAE

Taking out a personal loan in the UAE has its advantages. The injection of cash can help pay for large one-off items in a systematic matter over time, such as improving your home through renovations, buying new furniture, or other expenses. Secondly, personal loans are generally available at lower interest rates than comparable financial products such as credit cards.

In addition, since personal loans are unsecured, you can book one without need for collateral or a guarantor, and the funds are usually credited to your account quickly – often within two or three working days if all documents are correctly submitted. Many banks also do not require you to hold a salary transfer account with them before issuing a personal loan in the UAE- This is in the case of a personal loan without a salary transfer.

Finally, a personal loan is among the most convenient ways to access extra funds in the UAE. You can apply for such a loan online or over the telephone with a minimum of documents, while paying it off is relatively straightforward with automated direct debits.

For all their benefits, however, personal loans for furniture or other expenses come with a few disadvantages. As with other financial instruments, fees and penalties may be high on personal loans in the UAE. So, although interest rates may be low, these extra charges can add up. Additionally, you will be required to adhere to a fixed payment schedule, with a possible early-payment fee if you want to settle the loan before the agreed tenor ends.

Finally, all loans work to increase your debt burden. Any loan should therefore be part of an overall personal finance strategy.

Should you take a personal loan to buy furniture?

The answer to that question depends on your own personal financial situation. In the UAE, personal loans can be an attractive and convenient option if you need a large sum of money quickly, since the funds can be credited to your account within a matter of days if all documents are correctly submitted. But any loan involves taking on debt, so helps to reflect carefully before using personal loans to buy furniture or for other discretionary expenses. When used responsibly, a personal loan can help bridge a funding gap.

If you know someone who wants to take out a loan to buy furniture or make house improvements, consider sharing this article with them.

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Keith J Fernandez is an editor and communications professional who advises on marketing content strategy. He is based between the UAE, the Netherlands and India and writes about business, technology and personal finance.

This article is intended to provide general information about finance and investments and does not replace or should be taken as professional financial advice. The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article except information on Citibank N.A. – UAE products referenced herein.
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