My husband and I have well-paid jobs in Dubai and collectively earn Dh45,000 a month. We also own property here. However, two years ago we took out a personal loan worth Dh300,000 to set up a restaurant in Dubai. Owing to Covid-19 disruptions, the restaurant never took off and it was a bad investment. We discontinued operations at the restaurant and are now faced with the daunting prospect of paying Dh20,000 in loan instalments each month. We also pay Dh8,000 for our mortgage every month, as well as property service charges, children’s school fees, our respective car loans and other living and social expenses. We are barely making ends meet and are worried about being caught in a debt spiral. We invested in a property in our home country with cash before taking out the personal loan in the UAE. Should we liquidate that asset to make our finances more manageable here? What would you recommend to help us get back on track with our finances? <b>NS, Dubai</b> Very few restaurants are good investments. The set-up costs are so high that the restaurant has to be incredibly successful just to break even. Plus, ongoing costs are high and competition is very fierce. It was unfortunate that Covid-19 ruined your plans, although it may have done you a favour by accelerating a business failure that may have otherwise taken longer and drained even more of your finances. So, you lost Dh300,000. The problem is, you borrowed it via an unsecured loan that is sure to have a high interest rate. That is a challenging and painful lesson to learn. See if you can reduce the interest rate on the loan. You may be able to increase your mortgage on your UAE property if the property value is not too close to the current mortgage balance. You can use this money, borrowed at a much lower interest rate, to pay down your more expensive personal loan debt. If there are two different banks involved, you may run into debt burden ratio problems, as your monthly payments (as well as 5 per cent of any credit card limit) should not exceed 50 per cent of your salary. You seem to be already over this limit with Dh20,000 on your personal loan and Dh8,000 on your mortgage. You may also be able to increase the term of the personal loan, up to a maximum of four years, so your monthly payment is lower. This will increase the total amount of interest you pay, however. If you can secure an interest rate significantly below your personal loan rate, you could try to obtain a mortgage on your property in your home country so that you don’t have to sell it. Otherwise, yes, selling that property is a good idea, as being close to a debt spiral is risky and the stress is bad for your health and career. If one of you loses your job, you may be unable 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 some money to reduce the loan balance, or any other assets you own? Can you raise money from your extended family to pay down the debt? You can even pay them interest, given how low deposit rates are at the moment. Now is the time to fully assess your finances, cut your expenses and focus all your efforts on reducing your debt. Your good combined salary will help a lot with this. Find other ways to generate income if necessary. Also take this opportunity to plan for your future retirement. How much do you want to cover your future living expenses from property, from stocks and bonds, from businesses you own and from pensions? Most residents will end up with a mix of the first two. Once you have solved your debt problems, start investing sensibly in well-diversified assets. I am glad you are being conscientious and proactive about managing your finances. It is unfortunate that your investment did not work out as planned but the fact that both you and your husband are employed is a positive. In your current situation, you have two options: the first, like you rightly mentioned, would be to liquidate your asset in your home country and use the proceeds to clear your debt. However, if you believe it may not secure the price you are seeking in case of a distress sale or if it will appreciate well in value in the longer term, it may be better to hold on to it for now. Given your situation appears to be more cash-flow related, the second option that you could explore is restructuring your current debt. Approach your bank to have a clear understanding of the current amount outstanding on the loan and discuss extending the existing loan tenor. By doing so, you could significantly lower your monthly instalment payments and manage your finances better. You should also plan to take a more prudent approach with your discretionary spending to build up your savings. I wish you the very best of luck and hope you will stabilise your finances very soon. I am so sorry to hear your restaurant endeavour was not successful. It must have been a very difficult decision to discontinue operations. However, you have done well to limit your debt to just the personal loan. Many would resort to using credit cards in your situation. While using a credit card would provide relief in the short term, they can make recovery very difficult and expensive in the long run. Regarding liquidating your property, I would always recommend keeping assets wherever possible. Is the property rented? If not, I would recommend renting it out and using the funds to contribute towards your expenses in the UAE. Depending on the value of your property, it is worth investigating 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 less than the interest charged on a personal loan. This will reduce the cost of your debt. You can also consider extending the term of the personal loan to reduce your monthly repayments below Dh20,000. This would ease the pressure on your monthly salaries, but I would recommend keeping the term to the absolute shortest possible time you can afford it. This would allow you to take financial advantage of the lower interest rate, pay off your debts and be debt-free as soon as possible. Ideally, if you rent out your property in your home country, this would cover the monthly mortgage payments. Interest rates are low at the moment. Have you discussed a remortgage option with your bank on your mortgaged property to reduce your monthly repayment? Be careful and ensure you understand the full costs involved with a new mortgage agreement. Many seem beneficial at first but if you add up the cost of switching, administration fees and charges, the new mortgage may actually cost more than the previous one. If you do not track your expenses, I would advise doing this for three to six months to find ways to save costs and give you clarity over what you are spending each month. Do you have any means to increase your income? Any additional income you can source will both ease the pressure on your monthly finances and also help get you out of debt quicker. <i>The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to </i><a href="mailto:pf@thenational.ae"><i>pf@thenational.ae</i></a>
