In UAE, Dubai and Abu Dhabi are the costliest cities to live in. In a survey conducted by Mercer, Dubai is the 20th and Abu Dhabi is the 23rd most expensive city in the world. Both UAE citizens and expatriates have been facing the brunt of the ever-rising prices in the region. The only option left with most people is to take a loan to manage their financial requirements. Banks and financial institutions have identified this problem and are doing their best to provide loans to consumers at affordable prices.
A Buyout loan is a facility provided by banks and financial institutions, where a loan is provided to a consumer having an existing loan with a bank or a financial institution to settle the previous loan and create a potential to access additional funds. These loans are eventually bundled and sold to investors as securities.
Buyout loans have been the rage in recent times encompassing various kinds of loans availed by consumers. Borrowers still pay a monthly installment but to a different institution. Most of the terms and conditions of the loan agreement remain unaltered but it gives the borrower some breathing space and a potential to borrow more funds.
When a consumer avails of the loan buyout facility, he/she reaps the following benefits:
- Consolidation of loans [if applicable]
- Potential access to additional funds
- Competitive interest rates
- Flexible repayment terms
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Most banks have certain eligibility criteria to be fulfilled to avail the loan buyout facility in UAE:
- It is available for:
1.Consumer goods loans
2. Medical loans
4. Home loans [for residential property]
5. Repair of residential property
- Approximately 30 percent of installments of your existing loan must be paid
- The loan should be more than six months old
- There should be no record of delayed or missed payments
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As is the case with eligibility, every bank can have its own requirement of documents to process your loan application. Apart from the application form, some basic documents needed are:
- Bank Statements [minimum 6 months]
- Salary Certificate
- Emirates ID [for locals]
- Passport and Visa copy [for expats]
- Salary continuation certificate
- Loan purpose [with supportive documents]
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There are different kinds of fees and charges associated with buyout loans, and they can vary with each bank.
- Processing Fee
- Loan Cancellation fee
- Life insurance fee
- Late payment fee
- Early settlement fee
There are three parties involved in the loan buyout facility – consumer, investor and financial institution.
Once a financial institution or a bank offers a loan buyout facility to a consumer, it bundles the debt and offers it to a prospective investor. The investor looks at it as a debt instrument with good returns. The financial institutions, usually offer these instruments to investors at discounted prices as compared to the amount owed by the borrower at the time of the buyout. This makes investing in buyout loans a lucrative option for debt instruments.
There are two financial institutions involved in a loan buyout transaction; the institution that sanctioned the original loan and the institution that offered the buyout facility.
The institution that had sanctioned the original loan benefits from this transaction as it does not have to wait for the agreed tenure of the loan to recover its funds.
The institution offering the buyout facility offers the instrument to prospective investors at a discounted price. This price is determined by adding up the outstanding principal amount, the interest due at the time of the buyout and a small amount to cover the costs.
The buyout facility enables the financial institutions to use the funds towards sanctioning more loans and generating income in the process.
In a nutshell, buyout loans in UAE offer consumers, investors, and financial institutions an option to benefit from the evolving market. While loans are a necessary evil for people living in UAE, having such options enables them to approach their debt with confidence. Since the borrowers are verified for their credit history by the original loan issuing banks and the repayment history by the institution providing the buyout facility, investors can be assured of a minimal risk investment. The financial institutions can use this facility to keep their borrowers and investors happy while expanding their business.
Abu Dhabi Islamic Bank [ADIB] offers Buyout Loan in the UAE of up to AED 20 million for UAE nationals and AED 15 million for expats.
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National Bank of Abu Dhabi [NBAD] offers Buyout Loans at interest rates starting at 4.74% p.a. The loan amounts offered are up to AED 5 million for UAE nationals and AED 2 million for Expats.
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