Comparison of the Personal Loan vs Overdraft Options in the UAE

People running their own business in the UAE or working for corporations may face the need of taking a loan for business purposes. They may often be confronted with the question as to whether they should avail of a personal loan or an overdraft.

Let’s dive into these options and figure out what’s best for you.

Overdraft

An overdraft is a special facility used by banks that allows the client to make a transaction over and above his account balance. The overdraft is considered to have taken place when the account of the person or the corporate does not have sufficient funds to cover the transaction, but the bank allows the transaction to go through at any rate. Practically, it is an extension of credit by the bank to the customer/corporate as a goodwill gesture for his association with the bank. An interest rate is levied and an overdraft fee is charged. The basic eligibility for availing of a bank overdraft in the UAE are:

• A minimum salary of AED 3000.
• The bank must have an established relationship with that client.
• The employer must be recognized by the bank management.

The overdraft facility comes in handy as a short-term loan and there’s no collateral required to avail it. However, the risk is that the interest rate is much higher than a personal loan, and the draft limit depends upon the monthly earnings of the borrower.  

Personal Loan

A personal loan can be taken by a person to finance several individual expenses. These can be availed for annual holiday plans or managing large expenses such as weddings, paying college fees, etc. The personal loan tenure refers to the duration over which the equated monthly instalments have to be repaid. This has to be strategically decided by the borrower, for it will be essential in managing the repayment of their finances. At this stage, the borrower needs to ensure that their credit score does not suffer due to the inability to repay. The factors to consider in choosing the correct personal loan tenure would include:

• A clear evaluation of one’s monthly income
• The loan amount and interest
• Monthly EMIs that need to be paid.  

A bank that is offering a personal loan in the UAE generally charges two types of interest rates: a flat interest rate and a reducing interest rate. The difference between the two arises in the amount on which the interest is being calculated. A flat interest rate would derive the amount for interest calculation from the original amount that has been borrowed. The rate would be consistently applied on that amount each month and it would not vary. On the other hand, the reducing rate of interest is based on the concept that with the repayment of each instalment, the principal amount reduces. Thus, the amount of interest will be charged upon the reduced principal amount, while the interest rate remains the same. Thus, the overall amount changes as interest declines with each monthly instalment.  

Comparison On the Basis of Key Features

Long term vs Short term financing

A personal loan is usually for a much longer period, for instance, a period of maybe 4 years. On the other hand, an overdraft facility is availed for a much shorter duration, and it is liable to be cleared within the same year.

Interest

In the case of a personal loan, the interest is charged on the amount that has been sanctioned. It will begin to accumulate from the outset, even if the borrower is not using the funds. In case the loan amount is prepaid, the prepayment fees will have to be paid along with the original amount and the interest that has become due till that time. In the case of an overdraft, the interest is charged upon the amount overdrawn. The interest will not be liable on the money above the overdraft limit.  

Debt limit

The limit that is allowed as the upper limit is usually higher for a personal loan since it is being sanctioned for a much longer duration. On the other hand, overdraft is a much more contingent instrument, and hence, the banks allow a lower debt limit.

Processing

In the case of a personal loan, you need a good credit score with the AECB. You also need to submit an application request and the loan gets disbursed only when it is approved. For every instalment of cash that is withdrawn, the same process would have to be followed. In contrast, the process for availing an overdraft facility is much swifter. The process can be managed within a couple of hours and should not take longer than one business day.  

Different banks offering Personal Loans in UAE

 

Banking Institution	Interest Rate	Minimum Deposit Required
Emirates NBD	Flat rate 8.39% Reducing Rate 14.99%	10000 AED
Dubai Islamic Bank Al Islami Salaam Finance	Flat rate 6% Reducing rate 10.97%	3000 AED
RakBank Personal Loan	Flat rate 5.43% Reducing rate 9.99%	5000 AED
Deem Finance	Flat rate 7.72% Reducing rate 14%	5000 AED
FAB	Flat rate 4.99% Reducing rate 9.29%	7000 AED
Commercial Bank of Dubai Personal Loan for UAE Nationals	Flat rate 3.14% Reducing Rate 5.75%	12000 AED

Overdraft features in different Banks

National Bank of Fujairah

• Eligibility with salary being at least AED 5000 and confirmation of employment with current institution for at least six months.
• Application for overdraft facility either against applicant’s salary or against their NBF Term deposit.

Commercial Bank of Dubai

• Extra business funding available as per requirement
• Overdraft charges are amongst the lowest in the country
• Credit will continue to be available throughout the agreed duration of the overdraft.

First Abu Dhabi Bank

• Loan of up to 90% of Fixed Deposit / Certificate of Deposit
• Revolving line of credit available

RAKBANK

• Provides a salary advance feature. Can be availed through RakDirect, the 24-hour banking service.
• Subscription amount of AED 150

Mashreq Bank

• Revolving Overdraft has a high overdraft amount. The maximum limit is an amount of AED 100,000.
• Secured Overdraft allows you to get a cash reserve of up to 95% against the fixed deposit made by the client.

Conclusion

One can easily compare the different options available while deciding whether they should opt for a personal loan or an overdraft. An overdraft is to be availed when one wants a fast solution, and it is not needed for a long duration. On the other hand, if the expense to be handled is substantial and requires a long-term commitment with repayment over an extended period of time, a personal loan would make more sense.