Joanna Rivera has lived in the UAE her entire life, but it wasn’t until two years ago that she first had reason to take out a bank loan.

The Filipina-American housewife, 42, and her husband Joseph, 44, borrowed Dh250,000 to help cover the rent on their four bedroom villa in Abu Dhabi’s Khalifa City and school fees for their three children. Since then, a cut in her husband’s mid-management pay package, combined with a rise in the cost of living, has led them to take out two more loans amounting to Dh110,000. “To keep a maid I needed an additional loan, and we also needed one for a new car. We are sinking deeper and deeper into debt and I can’t see a way out right now.”

The Riveras’ situation is not uncommon in the UAE, where personal borrowing for essential outgoings such as rent and school fees is becoming more commonplace. Many expatriates are now forced to fund their future lifestyles, as annual rents are expected upfront and while school fees are generally paid a term ahead, discounts are offered for paying the entire year.

“The availability of credit and the sense that we should, as expatriates, have it all means people are increasing borrowing their lives a year in advance, with the hope that they will be able to manage the commitment,” says Caroline Domanska, the founder of Money Mindset Coaching. “The worry is that rent is due every year and school fees come every year so when will the cycle of debt stop?”

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Money blog

■ Six tips to live a debt-free lifestyle in the UAE

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The number of loans granted to UAE residents in the first quarter of the year increased by 6.5 per cent from a year earlier. Between March last year and March this year, consumers in the UAE took out a total of Dh1.3 trillion ($355 billion) in personal loans, according to National Bank of Abu Dhabi.

There is no ignoring the UAE’s rising cost of living.

According to the 2015 Cost of Living survey by the human resources consultancy Mercer, the country’s cities are the most expensive in the Middle East for expatriates. Abu Dhabi has moved up 35 places from last year to become the 33rd-most expensive city in the world, while Dubai rose from 67th to 23rd.

While rents in Dubai have fallen by 3 per cent this year according to Cluttons, Abu Dhabi tenants are facing affordability issues, with the average annual rent in the capital at Dh204,000 per property, while the average annual expatriate income is Dh199,000.

School fees are also a financial headache.

The Knowledge and Human Development Authority has allowed private schools in Dubai to increase their fees for the coming academic year by about 4 per cent. The previous year, average school fees went up by about 6 per cent.

“There has been an increase of 800 per cent in the number of people specifically searching for education loans this year as compared to last year,” says Ambareen Musa, the founder of the money comparison website Souqalmal.com, adding that the number of loan products listed by the site has risen 5 per cent in the past 12 months. “Salaries are not keeping up with the rising cost of living, only increasing by about 5 to 6 per cent on average every year. Banks have been introducing new rental loans, cash flow loans and education loans over the past few years.”

This has included United Arab Bank. Its American executive vice president of retail banking, Tony Graham, 41, recalls his surprise at being asked to pay his year’s rent in advance when he first arrived in Dubai in August 2013.

“This is the only one of the 10 countries I’ve lived in where landlords ask for one or two cheques for the entire year’s rent in one go. Rent is usually the largest expenditure, and in countries where you pay your rent on a monthly basis it’s fine because you get your salary paid monthly and your cash flows are aligned. Here, with rent, your cash flows are not aligned. A lot of people can’t cover their rent. It’s too much and really impacts their cash flow.”

Mr Graham had the idea to set up loans specifically designed to help pay rent and school fees, and since UAB’s cash flow loans came onto the market in January last year, other banks have followed suit.

“If you transfer your salary to us and give us a draft lease agreement with your landlord, we will cut a cheque to the landlord for one year’s rent and then the customer pays us back over 12 months at 3.99 per cent reducing,” says Mr Graham. “It’s a hugely popular product.”

It may be popular, but the debt can be an extra financial burden on already overstretched households. Mrs Rivera says she and her husband will not finish paying off their first loan until 2017, making a debt-free existence a challenge, as her husband’s housing allowance, which covered their whole rent cheque five years ago, now only covers half.

“You want to live a certain kind of lifestyle, yet the package given is differentiated depending on your nationality,” she adds. “We pay a sizeable amount for rent to live a decent life. Otherwise I’d have three kids and a maid in a two-bedroom apartment.”

Andrew Prince, a financial planner for Acuma, says his clients’ packages are increasingly being clipped.

“Employers are appealing to a broader spectrum of employees with an annual lump sum rather than bespoke packages made up of allowances including schooling and housing,” he says. “But the new pay structure puts the onus on the employee to manage their finances carefully, and many new to the country are being obliged to take out a loan to cover the initial outgoings.”

The Pakistani Amna Azeem, who works for an audit firm in Abu Dhabi, has had her benefits trimmed. A moving allowance, which was about Dh20,000, has been cut altogether, and a Dh15,00 furniture allowance has been reduced to Dh7,000 and is only offered to senior management rather than all new joiners. “Most people I know also have credit card debt mounting, especially for things such as gadgets and household electronics, and furniture,“ adds Ms Azeem.

Some are also using credit cards to pay bigger bills.

Michelle Pinkerton, 35, moved to Abu Dhabi with her four-year-old son earlier this year, placing him at a reputable British School. But she did not have the cash available to pay the tuition fees upfront. “I had no choice but to pay for my son’s Dh18,400 first-term school fees on my credit card, as I’d spent all my savings on rent and furniture settling in”, she explains.

Ms Pinkerton has opted to pay back a minimum monthly amount of Dh552 and claims she will be charged more than Dh12,000 in interest payments before she clears the debt. “It’ll take me nearly five years to pay off; the interest is almost as much as the amount I borrowed in the first place, and I’m still trying to hold cash each month to pay for next term’s school fees.”

So what is the solution for those squeezed by the everyday costs of life?

“Expats are taking on debt to maintain the standard of living they have become accustomed to, rather than looking to change their standard of living,” says Ms Domanska. She advises working out your basic level of expenditure such as the cost of keeping a roof over your head and food on the table.

“This will give you reassurance of what you can manage on without adding to debt,” she says. “Then decide what upgrades to your basic lifestyle are non-negotiable, such as a three versus a four bedroom home, the area you live, the maid and the car. Then ask yourself if you are willing to go into debt for these things.”

Education on the cards

Expatriates are increasingly turning to credit cards to pay tuition fees as more banks enter the market to meet the growing demand for education-linked products, says Sivarama Subramanian, the head of retail assets and cards for Emirates NDB.

“Customers have come back from holiday and are looking for some flexibility to manage expenses,” Mr Subramanian says. “A lot of are now paying fees using a credit card because banks are offering them the opportunity to pay back the fees in instalments or giving them a special loan in a card that’s made for that.”

Ambareen Musa from Souqalmal.com says cards typically offer two types of benefits – upfront discounts/cash back on fee payments or 0 per cent monthly instalment plans.

Among them is the NBAD Gems credit card, which offers up to 7 per cent discount on advance payment of tuition fees at any of the UAE’s 29 Gems schools. Cardholders can also opt for a 0 per cent easy payment plan for 12 months.

The Standard Chartered titanium credit card also offers a 0 per cent monthly instalment plan for 6-12 months for school fee payments.

But cards such as this only benefit the fiscally disciplined.

The 0 per cent payment plan offered by the NBAD Aldar Academies Visa platinum credit card, for example, can be spread over 18 months.

“If you then pay the next year’s fees the same way – over another 18-month instalment – at some point during the second academic year you will be paying two sets of instalments at the same time, effectively doubling your tuition payments for six months,” says Acuma’s Andrew Prince.

Others parents opt for education loans. Abu Dhabi Islamic Bank’s Education Finance and ADCB’s Education Smart Loan offer up to Dh250,000 to support educational needs, with a processing fee of 1 per cent of the amount borrowed and interest rates ranging from 9.25 per cent to 12 per cent.

Ms Musa adds: “Typical customers for education loans come from a large pool of non-manager-grade employees as well as those working in the 50 per cent of companies who don’t get a separate allowance for education support.”

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