Personal Loans vs. Credit Cards: Which Option is Cheaper for Borrowing in the UAE?

When it comes to borrowing money in the UAE, two of the most common options are personal loans and credit cards. Both provide access to quick funds, but they differ significantly in terms of interest rates, repayment terms, and overall costs. Whether you're looking to consolidate debt, finance a large purchase, or cover emergency expenses, understanding which option is cheaper can save you money in the long run.

1. Personal Loans in the UAE

A personal loan is a lump sum of money that you borrow from a bank or financial institution and repay over a fixed period, usually with fixed monthly payments. Personal loans in the UAE are widely offered by banks like Emirates NBD, Mashreq, and ADCB, with options available for both expatriates and UAE nationals.

Key Features of Personal Loans:

• Loan Amount: Typically ranges from AED 10,000 to AED 4 million depending on your salary and eligibility.

• Repayment Period: Generally between 12 months and 48 months, although some banks offer longer terms for specific loans.

• Interest Rates: Personal loans in the UAE typically have reducing balance interest rates, starting as low as 2.75% to 5% per annum for salaried individuals.

• Processing Fees: Many banks charge a one-time 1% processing fee on the loan amount.

• Eligibility Criteria: Minimum salary requirements, usually between AED 5,000 and AED 10,000 monthly, and stable employment history are often required.

Advantages of Personal Loans:

• Lower Interest Rates: Personal loans generally offer lower interest rates compared to credit cards, especially if you're borrowing a large amount.

• Fixed Monthly Payments: With a personal loan, you know exactly how much you have to repay each month, which helps with budgeting.

• No Collateral Required: Most personal loans in the UAE are unsecured, meaning you don't need to provide any collateral.

Disadvantages of Personal Loans:

• Longer Application Process: Personal loans require documentation such as salary certificates, bank statements, and proof of residency, which can make the application process lengthier.

• Fixed Commitment: Once you take out a personal loan, you're locked into fixed payments for the loan term, with limited flexibility to adjust payment amounts.

• Prepayment Penalties: Some banks charge a penalty for early loan settlement, usually around 1% of the outstanding amount.

  
  

2. Credit Cards in the UAE

Credit cards offer a revolving line of credit, allowing you to borrow up to a predetermined limit and repay over time. Unlike personal loans, credit card payments are more flexible—allowing you to pay off part or all of your balance each month.

Key Features of Credit Cards:

• Credit Limit: Depending on your salary and credit history, limits typically range from AED 5,000 to AED 500,000.

• Interest Rates: Credit card interest rates in the UAE are usually much higher than personal loans, ranging from 30% to 40% annually (or 2.5% to 3.5% monthly).

• Minimum Payments: Banks typically require you to pay a minimum of 5% of the outstanding balance each month, allowing flexibility but prolonging debt repayment.

• Promotional Offers: Many UAE credit cards offer introductory 0% interest rates for 3 to 12 months on purchases or balance transfers, which can help with short-term borrowing.

Advantages of Credit Cards:

• Immediate Access to Credit: Credit cards provide instant access to funds without the need for loan approval or paperwork.

• Flexibility: You can choose to pay off as much or as little of your balance each month, giving you more control over your payments.

• Rewards Programs: Many credit cards in the UAE offer cashback, air miles, or points for everyday purchases, which can offset some borrowing costs.

Disadvantages of Credit Cards:

• High Interest Rates: If you don’t pay off your balance in full, the interest on credit cards is significantly higher than personal loans.

• Temptation to Overspend: Credit cards make it easy to accumulate debt, especially with high credit limits and the temptation of minimum payments.

• Fees: Late payment fees, cash advance fees, and annual fees can add to the cost of borrowing if not carefully managed.

  
  

3. Cost Comparison: Personal Loans vs Credit Cards

Interest Rates:

• Personal Loans: Interest rates on personal loans in the UAE are usually 2.75% to 5% per annum (reducing balance method), making them much cheaper for long-term borrowing.

• Credit Cards: Interest rates on credit cards range from 30% to 40% annually, which is significantly higher and can lead to rapidly increasing debt if not repaid quickly.

Example:

Let’s say you need to borrow AED 50,000.

• Personal Loan: A loan with a reducing interest rate of 5% over 3 years would result in a total interest cost of approximately AED 3,900.

• Credit Card: If you borrowed AED 50,000 on a credit card with a 3.5% monthly interest rate (or 42% annually), and only made minimum payments, the interest could balloon to AED 21,000 or more, depending on how long it takes to repay.

Fees and Charges:

• Personal Loan Fees: Processing fees are usually 1% of the loan amount (capped at AED 2,500), and some banks may charge an early settlement fee of 1%.

• Credit Card Fees: If you miss payments or only make minimum payments, late fees can be as high as AED 200-250 per month. Many cards also have annual fees ranging from AED 200 to AED 2,000, depending on the card tier and benefits.

  
  

4. When to Choose a Personal Loan

Personal loans are more suitable when:

• You need to borrow a large sum of money: If you need a substantial amount (e.g., for a car purchase, debt consolidation, or home renovations), a personal loan offers lower interest rates and predictable payments.

• You want structured repayments: With fixed installments, personal loans provide a clear timeline for repaying your debt, which helps with financial planning.

• You can qualify for a lower interest rate: If you have a good credit history and steady income, you may be eligible for lower interest rates, making personal loans a cost-effective borrowing option.

  
  

5. When to Choose a Credit Card

Credit cards are ideal for:

• Short-term borrowing: If you need a small amount of money for a short period (e.g., covering an emergency expense until your next paycheck), and you can pay off the balance quickly, credit cards can be convenient.

• Taking advantage of promotional offers: If you find a credit card with 0% interest on purchases or balance transfers, it can be a great short-term borrowing tool, as long as you repay the balance before the promotional period ends.

• Rewards and perks: If you can manage your credit responsibly and pay off your balance monthly, you can benefit from rewards such as cashback, travel perks, or discounts.

Which Option is Cheaper?

For most borrowers in the UAE, personal loans are generally cheaper than credit cards, especially for larger amounts and longer repayment periods. With lower interest rates, fixed repayments, and clear loan terms, personal loans offer more predictable and manageable costs.

However, if you need access to a smaller amount of money and can repay it quickly, a credit card might be a better option, especially if you take advantage of promotional 0% interest periods or rewards.

Before deciding, it’s essential to compare the terms, interest rates, and fees offered by UAE banks and credit providers, and carefully consider your ability to repay the borrowed amount on time.