Dubai: Parents in the UAE who are planning to take out some heavy personal loans to fund their children’s college education will have to do some tough calculations and budget planning to do. Because after more than a decade, the interest rate burden they have to bear is becoming higher with every other month – until such time the US Federal Reserve decides rates have gone up enough to tame inflation.
But that will be scant consolation for those thinking of a loan, because successive rate hikes through 2022 have already had an effect on demand. Banking sources talk of mortgage pick up slowing down in the early days of 2023, a continuation of the trends that were there in Q4-2022.
While many parents dig into their savings or have systematic investment (SIP) schemes, they also resort to taking personal loans at high interest rates to pay for their kids’ uni-fees. However, unlike in the West, banks in the UAE provide loans for educational purposes to students based on their parents’ credentials and financial health.
However, they cannot avail of education loans unless the parents have a minimum monthly salary of Dh7,000.
The average tuition fee for undergraduate courses in UAE ranges from Dh37,500-Dh70,000 a year. For post-graduate programmes, it goes from Dh55,000-Dh75,000 annually, not including the cost of living expenses.
The cost of studying abroad can go up to Dh250,000, depending on the country and the university chosen.
“Students who want to move out of the UAE for their higher education cannot afford a loan in this case,” said Sandeep Jadwani, Head of Investment Advisory at Habib Investment. “That’s why loans offered are connected to the financial credentials of the parents.
Education loans are still not very popular in the UAE, as banks issue such loans on commercial terms on a four-five year repayment terms (unlike the much longer tenures available in the West to pay off).
This is why, parents might need to think differently on how to raise the funds.
Asset-backed loans?
To ease the stress of paying for the tuition fees, personal finance experts say asset-backed loans are becoming a popular option among families in the UAE, seeking loans to pay for their kids’ education. A ‘secured’ loan is where a borrower pledges an asset as collateral.
This way, the borrower can seek a higher loan amount – and at relatively affordable interest rates. Expatriate borrowers can avail up to 75 per cent of the asset’s value. Leading banks - including Emirates NBD, Commercial Bank of Dubai, RAKBANK - offer such instruments to business owners on their movable and immovable assets. The loans can be used for personal purposes.
“When parents take loans from banks back in their country of residence, they face the risk of volatile foreign exchange,” said Jadwani. “This has seen many expat parents take loans in the UAE and backing that against property, which is a popular choice.”
High interest rates
However, higher interest rates still act as a deterrent for such loans. According to Damodhar Mata, a Dubai-based financial advisor, interest rates on asset-backed loans in the UAE currently stand at 5.9-6 per cent per reducing rate per annum.
“Only a year ago, it was 1.99 per cent,” said Mata.
For example, if a parent has an asset worth Dh1 million in the UAE, with an outstanding mortgage of Dh 500,000. “Banks can release an additional equity of Dh250,000 as a top-up loan on the same property, which a parent could use to pay university fees,” he added.
These are mortgage loan buyouts being offered by the bank, and in such cases, the parent should have a monthly income of Dh30,000 and above.
The parent’s total loan amount would be the outstanding mortgage plus the top-up loan, which is Dh750, 000. In this case, the parent ends up paying Dh14,253 per month for a reduced interest rate of 5.29 per cent for 60 months. Parents can get a loan for up to 25 years against their property in the UAE.
“These are mortgage loan buyouts being offered by the bank, and in such cases, the parent should have a monthly income of Dh30,000 and above,” said Mata. (If the parent avails of other credit products such as bank loans or credit cards, they may be overburdened with debt.)
The interest rate for a personal loan against property could be relatively low since the property acts as a reliable form of leverage in the eyes of the financial institution.
It is also important that the parents do not compromise on their retirement savings corpus in paying for the education.
“Depending on the terms offered, if there is no choice, parents need to evaluate between an education loan and a personal loan and go with the one that has lower interest over the period of the loan after accounting for charges like processing fee, besides the rate of interest.”
Parents also need to avoid paying fees using credit cards at all costs. “It is the most expensive loan in the market, and it would result in very high recurring interest rates,” said Sandeep Jadwani, Head of Investment Advisory at Habib Investment Ltd. “Non-payment would negatively impact their credit history.”
Refinance?
Refinancing their loan through a balance transfer may be an option for parents looking to lower their interest outgo, said Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors. “Additionally, if their cashflow or monthly income allows them to pay a higher loan instalment, they should evaluate taking a shorter tenor loan so that the overall interest paid on loan can be lowered,” said Dhawan.
What other options do families have on tapping student loans?
Overdrafts
Some families are also opting for overdrafts, which is common among salaried customers. An overdraft facility provides parents with instant cash support of up to two times the salary. However, these are expensive as they are unsecured and have high-interest rates.
Non-banking institutions
Some parents also take personal loans from non-banking financial companies such as Dunia and Gulf Finance.
Approach the university
Parents can approach universities here and abroad to provide an interest-free instalment plan for outstanding tuition fees. In this case, parents pay higher education fees monthly, like school fees or rent.
