“We lost our restaurant and owe 300,000 Dh”

My husband and I have high paying jobs in Dubai and collectively earn Dh45,000 per month. We also own property here. However, two years ago, we took out a personal loan of Dh300,000 to open a restaurant in Dubai.

Due to the Covid-19 disruption, the restaurant never took off and it was a bad investment. We have given up on the restaurant business and are now faced with the daunting prospect of paying Dh20,000 in loan installments each month.

We also pay Dh 8,000 for our mortgage each month, as well as real estate service fees, children’s school fees, our respective car loans, and other living and social costs. We are barely making ends meet and fear that we will be caught in a debt spiral.

We invested in a property in our home country with cash before taking out the UAE personal loan. Should we liquidate this asset to make our finances more manageable here? What would you recommend to help get us back on track with our finances? Nova Scotia, Dubai

Debt Panelist 1: Steve Cronin, Founder of DeadSimpleSaving.com

Very few restaurants are good investments. The installation costs are so high that the restaurant has to be incredibly successful to break even. In addition, the ongoing costs are high and the competition is fierce.

It’s unfortunate that Covid-19 ruined your plans, even though it may have done you a favor by accelerating a business bankruptcy that could have taken longer and drained your finances even more.

So you have lost 300,000 Dh. The problem is, you borrowed it via an unsecured loan that is sure to have a high interest rate. It is a difficult and painful lesson to learn.

See if you can lower the interest rate on the loan. You may be able to increase your mortgage on your UAE property if the property’s value is not too close to the current mortgage balance. You can use this money, borrowed at a much lower interest rate, to pay off your more expensive personal loan debt.

If there are two different banks involved, you may run into debt-to-income ratio issues because your monthly payments (as well as 5 percent of any credit card limit) should not exceed 50 percent of your salary. You already seem to exceed this limit with 20,000 Dh on your personal loan and 8,000 Dh on your mortgage.

You can also increase the duration of the personal loan, up to a maximum of four years, which reduces your monthly payment. However, this will increase the total amount of interest you pay.

Depending on the value of your property, it is worth investigating the possibility of taking out a mortgage on the property to clear the UAE personal loan.

Carol Glynn, Founder of Conscious Finance Coaching

If you can get a much lower interest rate than your personal loan, you can try getting a mortgage on your property in your home country so you don’t have to sell it. Otherwise, yes, selling this property is a good idea because being close to a spiraling debt is risky and stress is bad for your health and your career. If one of you loses your job, you may not be able to pay off the personal loan and find a cheaper loan to replace it.

Are there any restaurant assets you can sell that will raise funds to reduce the loan balance, or any other asset you own? Can you raise money from your extended family to pay off the debt? You can even pay them interest, given the low deposit rates right now.

Now is the time to fully assess your finances, reduce your expenses, and focus all of your efforts on reducing your debt. Your good combined salary will help you a lot. Find other ways to generate income if needed.

Also take this opportunity to plan for your future retirement. How much do you want to cover your future living expenses with real estate, stocks and bonds, businesses you own and pensions?

Most residents will end up with a mix of the first two. Once you’ve resolved your debt problems, start investing wisely in well-diversified assets.

Debt Panelist 2: R Sivaram, Executive Vice President and Head of Retail Banking Products at Emirates NBD

I am glad that you are conscientious and proactive in managing your finances. It’s unfortunate that your investment didn’t work out as expected, but the fact that you and your husband are both employed is a positive.

In your current situation, you have two options: the first, as you rightly mentioned, would be to liquidate your assets in your home country and use the proceeds to pay off your debt.

However, if you think it may not guarantee the price you are looking for in a distress sell, or if it will appreciate well in the longer term, it may be best to hold onto it for now.

Since your situation seems more related to cash flow, the second option you might want to explore is restructuring your current debt.

Talk to your bank to fully understand the current loan amount and discuss extending the term of the existing loan. By doing so, you could significantly reduce your monthly payments and better manage your finances.

You should also consider taking a more conservative approach with your discretionary spending to build up your savings. I wish you the best of luck and hope you stabilize your finances very soon.

Debt panelist 3: Carol Glynn, founder of Conscious Finance Coaching

I am very sorry to hear that your attempt to restore was unsuccessful. It must have been a very difficult decision to stop operations.

However, you have done well to limit your debt to the personal loan only. Many would use credit cards in your situation. While using a credit card would provide short term relief, it can make recovery very difficult and costly in the long term.

Since your situation seems more related to cash flow, the second option you might want to explore is restructuring your current debt.

R Sivaram, Executive Vice President and Head of Retail Banking Products at Emirates NBD

When it comes to liquidating your property, I would always recommend keeping the assets where possible. Is the property rented? Otherwise I would recommend renting it and using the funds to help with your expenses in UAE.

Depending on the value of your property, it is worth investigating the possibility of taking out a mortgage on the property to clear the UAE personal loan.

I would expect the interest rate on the mortgage to be significantly lower than the interest charged on a personal loan. This will reduce the cost of your debt.

You can also consider extending the duration of the personal loan to reduce your monthly payments below 20,000 Dh. This would ease the pressure on your monthly wages, but I would recommend keeping the duration as short as possible.

This would allow you to take advantage of the lower interest rate financially, pay off your debts, and get out of debt as quickly as possible. Ideally, if you are renting out your property in your home country, this would cover the monthly mortgage payments.

Interest rates are low right now. Have you discussed a re-mortgage option with your bank on your mortgaged property to lower your monthly repayment?

Be careful and make sure you understand all of the costs associated with a new mortgage contract. Many seem beneficial at first, but if you add up the cost of the transfer, administration fees, and charges, the new mortgage can actually cost more than the previous one.

If you don’t keep track of your spending, I would suggest doing it for three to six months to find ways to cut costs and give you a clear picture of what you’re spending each month.

Do you have ways to increase your income? Any additional income you can get will both relieve the pressure on your monthly finances and also help you get out of debt faster.

The Debt Panel is a weekly column designed to help readers tackle their debts more effectively. If you have a question for the panel, write to [email protected]

Updated: Aug 25, 2021 5:00 a.m.

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