Are the loan rates on the billboards and banners really the rates you end up paying?
An advertised loan rate sometimes sounds too good to be true. Maybe it is.
What you see is not always what you get. It is important to understand how the rate advertised is calculated before choosing.
Ask yourself the question: Is the rate advertised by the bank a flat rate or a reducing balance rate?
What is the difference between flat and reducing balance interest rates?
Loan rates offered by UAE banks can differ quite a lot, varying from 2.99% to 23% of the loan amount.
Why such a broad range?
There are two ways of calculating the interest rate on your loan, flat and reducing rates. Flat rates are usually lower and it simply calculates the interest on the entire loan amount without considering the amount already paid off.
For example, if you take a loan of AED 10,000 ($2,722) at a flat rate of 10% p.a. over five years your total interest would be AED 5,000 (10,000*10%*5).
But a reducing balance rate calculates the interest on the outstanding balance of your loan which means you pay interest on the amount left to be paid off.
The advertised level of interest can easily misunderstood.
For example, what would you choose between a 24% and 18% rate? Probably the 18%, if the rate is an important factor in your decision.
But think again. Until you know if they are both calculated in the same way, it is hard to know which one is the cheapest.
The calculation below clearly shows you that a loan at 18% flat rate is actually more expensive than a reducing rate loan at 24%:
Many advertising messages quote low rates but do not specify the method of calculation and we urge customers to request clarification from the bank on the type of rate that is being advertised.
Human nature naturally gets inclined towards lower rates but it is very important to check all the fine print and compare like for like.
If you are looking for a full list of personal loans with all their fees and whether they are reducing or flat, you can find the comparison of all loans in the UAE at www.souqalmal.com.
You can also find a guide to interest rate calculation and conversion of reducing to flat on our blog.