UAE announces three main differences between “personal” and “real estate” loans

Omar Abbas - | Mix

Two banking experts have highlighted three primary distinctions between personal and real estate loans: value, repayment period, and interest rate.

Key Differences Between Personal and Real Estate Loans

These insights were shared in response to queries received regarding the suitability of each loan type for customers looking to purchase property.

Banking expert Ahmed Arafat explained the first major difference: personal loans typically have a ceiling of 20 times the borrower's salary, with a maximum repayment period of four years. The interest rate on personal loans is higher due to the lack of collateral, relying solely on the borrower’s salary. This makes personal loans riskier for banks, as there is no guarantee the borrower will maintain regular income until the end of the repayment period. Consequently, personal loans are generally unsuitable for purchasing real estate, given the high property prices.

Conversely, real estate loans offer more substantial amounts, covering up to 85% of the property's value, with a much longer repayment period extending up to 25 years. The interest rate for real estate loans is lower compared to personal loans because the loan is secured by the property itself, which acts as collateral. This security reduces the risk for lenders, resulting in more favorable loan terms for borrowers, including lower monthly installments.

Converting Loan Types

Arafat also discussed the potential conversion of real estate loans to personal loans. While it is possible for a borrower to convert a real estate loan into a personal loan, this change shortens the repayment period to four years, significantly increasing the installment amount. Such a shift can place considerable strain on the borrower’s budget, often exceeding 50% of their income, which does not align with the Central Bank’s guidelines currently in effect.

On the other hand, it is prohibited to take out a real estate loan to repay a personal loan according to Central Bank instructions. However, borrowers can obtain a real estate loan to refinance another real estate loan, or take a personal loan to repay a real estate loan, provided they adhere to the four-year repayment term for the personal loan.

Banker Mustafa Ahmed emphasized the importance of customers assessing their ability to pay installments before deciding on a loan type. When considering a personal loan for property purchase or converting an existing real estate loan to a personal loan, borrowers need to carefully evaluate the installment value and the repayment period.

Ahmed pointed out that customers should compare the interest rates of both loan types and choose the one that offers the most favorable terms in terms of installment value, repayment period, and overall interest paid. Typically, most customers prefer real estate loans for financing property purchases due to the extended repayment period and lower installment amounts. In contrast, personal loans can result in higher monthly payments, which may become burdensome.

The primary differences between personal and real estate loans lie in their value limits, repayment durations, and interest rates. Personal loans, with their higher interest rates and shorter repayment periods, are less suitable for financing property purchases. Real estate loans, offering larger amounts, longer repayment periods, and lower interest rates, are generally preferred for real estate financing. Customers must carefully consider their financial capacity and compare loan terms to determine the most appropriate option for their needs.

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Omar Abbas
Omar Abbas
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