The Debt Panel: 'Will a consolidated loan affect my credit score?'

I have accumulated numerous debts since arriving in the UAE three years ago. I have a car loan of Dh20,000 ($5,445), a personal loan of Dh35,000 and owe a total of Dh25,000 on three credit cards . However, I am finding it difficult to keep up with so many different instalments on my monthly salary of Dh15,000. The monthly instalments on the credit cards have also increased since interest rates started rising earlier this year . While I have not yet missed any payments, I am having to make sacrifices with my daily living expenses by cutting back on groceries and taking public transport instead of driving my car. At the end of the month, I have nothing left in my account, which means that I am also unable to save money. I have been researching the benefits of taking out a consolidated loan , but am unsure if this is a viable option for me. Would you recommend doing this and if so, how would rising interest rates affect the monthly payments? And would it affect my credit score if I consolidated my debts? DT, Dubai You are slowly building an unsustainable lifestyle based on debt. Fortunately, you have identified the problem before job loss or a sick relative completely wipes out your finances. Your debt totals Dh80,000, which is more than five months’ salary. The problem is you can barely afford to make the minimum monthly payments, let alone pay off the debt faster. Personal loans and especially credit cards are “expensive” debt with high (and increasing) interest rates. Only paying off the minimum each month is dangerous for credit cards, as the total debt will quickly grow. A debt consolidation loan is a good idea — it will wipe clean your card balances and reduce your interest payments. It will also simplify your finances as you won’t have to make three different card payments each month. It won’t affect your credit score, so it is best to apply for one before you miss any payments. Your salary is well over the minimum limit for a consolidation loan (Dh7,000). However, some banks can be difficult about them, claiming they want to wait until you have missed payments. If the bank that has provided your personal loan won’t help you, then talk to others and be prepared to move your salary to them. You may be able to get a loan with a fixed interest rate — your monthly payments would then stay constant. Otherwise, if your loan has a “floating” interest rate linked to Eibor (the central bank rate), your monthly payments may increase if it goes up. This would squeeze you financially and you should plan how you could make your payments under different interest rates. A consolidation loan buys you some time and financial breathing space. However, you must not get complacent and continue to live beyond your means through debt. Ideally, you should look to pay off your consolidated personal loan as soon as possible, so you can start to invest sensibly for your future. Most importantly, do not allow card balances to grow again. You must only put on a credit card what you are able to pay off in full at the end of the month. Many people end up in cycles of debt consolidation when their card debts grow back. Find ways to increase your income and reduce your expenses, so that you never face this problem again. Your total debt is at an unhealthy level compared to your salary. Based on the information provided, a consolidation loan is likely to be the best option for you. Well done for facing the situation and seeking a way to resolve it. Many people ignore their debts, which causes them to grow unnecessarily. I would recommend approaching your bank and asking for a consolidation loan for your personal loan and credit card debt combined. Ask for various terms such as two years, four years and five years. Use this information to calculate how much you can afford to commit from your salary each month. Make sure you understand how much each term will cost in terms of interest charges. The fact you have not missed any payments will stand strongly in your favour with the bank and your credit rating. Hopefully, your bank will be helpful. It is unlikely the bank will include your car loan as part of the consolidation loan as it has a lien against your car. I would consider selling your car and using the proceeds to pay off or reduce your loan substantially. If you cannot afford to use it, then it may be best to sell it. If there is a balance left on the car loan after you sell the car, this balance can be included in the consolidation loan. Regarding interest rates, a personal loan will carry a fixed interest rate. It will not increase or decrease once the terms are agreed and the loan contract is signed. The interest rate will likely be higher than it was a few months ago but it will be less than the interest rate you are paying on your credit card debt. Also, having one set amount to pay every month will be easier to manage, plan for and be less stressful than managing the various debts as you are now. At a minimum, I would recommend focusing on the credit card debt as a priority, as this will be the most expensive in terms of interest charges. Don’t use it any more as adding expenses to it every month makes clearing it very difficult. If you do obtain a consolidation loan, cancel your credit card as soon as it is paid off. You do not want to risk raising credit card debt again. You have a lot of bad debt that attracts high interest rates, particularly the three credit cards. As my fellow panellists point out, if not paid off in full each month, your credit card debt will rise quickly and become unmanageable. In your case, a consolidation loan is a smart move to bring down your monthly instalments. I can't stress enough just how important it is to cut up your credit cards and not be tempted to use them while paying off a consolidated loan — you do not want to accumulate further bad debts. This will require a change in mindset — basically, if you can't afford something, then don't buy it. Instead, either save up for it or even revisit the idea a week or two later and you may find that you no longer want it. To pay off the consolidation loan quicker — and start saving and investing for your future — you could also explore side hustle options to earn extra money on weekends or after hours during the week. This could be based on a hobby or your professional skills. There are a number of websites where you can find remote, part-time work — including FlexJobs.com to Fiverr, Upwork and We Work Remotely. Eliminating bad debts from your life is financially empowering as you are no longer beholden to banks to pay for your lifestyle. I hope you discover this feeling soon and wish you the best for the future. 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 pf@thenational.ae

The Debt Panel: 'Will a consolidated loan affect my credit score?'

The Dubai resident is struggling to pay monthly instalments on several loans and credit cards