Usually, any bank requests for a security cheque while approving a loan or credit card. These cheques are used during certain situations like if the loan or credit cardholder goes default on the repayment of the debt installments. This will be a kind of guarantee bank request while giving any credit.
The format of a security cheque
A security cheque is just a regular cheque issued by the cheque holder. The cheque holder would sign the cheque in favor of the bank and not give the date.
How does this help the banks?
Usually, when the loan holder doesn’t pay the installments for more than a specific period (which is usually 3 months), they send the loan holder some polite reminders even after that if there is no action taken by the loan holder, then security cheque will be used against the loan holder.
When the loan holder goes default on the installment payments, security cheques will be in favor of the banks. They can deposit the security cheque. If there are funds in the account banks will get the cash resorted from the cheque else the cheque would get dishonored and the drawer will be filed for a cheque dishonored case.
Previously the law was, the banks will enter the cheque amount according to the pending loan amount but now the current rule according to the Central bank of UAE, only the date column will be unfilled and the interest on the loan and loan amount will be entered on the cheque.
Points to remember
- The drawer should make sure to give the name of the bank on the cheque else it can be misused by any individual
- According to the new rule in Dubai, if an individual is filed for a cheque dishonored case, he will be fined without any jail term if the cheque amount is below AED 200,000.
Not paying loans or credit card installments on time is definitely not a good practice. It can have a bad impact on the credit score and if a cheque is bounced it will be recorded on the credit report. So combinedly both cases can worsen the chances of getting any financial assistance from banks in the future.
Therefore the loan/ credit card holder must be prepared well financially and not miss any of the installment payments.