The “grace period” in transferring debts…a “break from payment” at a later financial cost

Traders said that marketing employees in banks do not disclose full details about the fees and benefits that accompany the offers they submit to transfer debts from one bank to another.

They explained to “Emirates Today” that bank employees communicate via phone or WhatsApp messages, offering to transfer the debt in exchange for what they described as the “temptation” of postponing the monthly installments at the beginning of payment, and in what is known in banking as a “grace period” ranging from two months to up to seven months in some banks, before regularly paying the monthly installments.

They emphasized that there is only one advantage to these offers, which is relief for several months from the burden of debt, especially in light of the presence of necessary obligations such as school tuition, or other living conditions, but it later becomes clear that these postponements are very expensive, calling for more transparency and clarity in detailing the total cost of transferring the debt, and clarifying whether the grace period is free without interest or entails interest added to the total debt.

For their part, two bankers said that the customer’s resort to transferring his debt from one bank to another varies according to personal circumstances, but there are criteria that must be ensured before making the decision to transfer the debt, the most important of which is that the interest charged as a percentage and value be lower in the bank to which the debt will be transferred, compared to the current bank, in addition to the lower value of the monthly deduction.

They stressed the importance of asking the customer about all the fees that accompany closing the loan in the bank he deals with, and those imposed by the new bank he chose, pointing out that the grace period that bank employees use to promote and market and entice the customer with several months of relief from the burden of debt, is unfortunately an extension of the life of the loan, and leads to an increase in the value of the interest, and thus the monthly installment, in addition to the fees imposed.

The “grace period” is a means used by banks to attract customers, without the customer noticing that this period results in: an increase in the monthly installment, and an early payment fee amounting to 1% of the remaining profit balance, in addition to the grace period interest offered by the bank.

Thoughtful transition

Banking expert Ahmed Youssef told Emirates Today: “The transfer of debt from one bank to another must be thoughtful, and according to the circumstances of each customer. It is also assumed that the transfer process will not take place unless it is to his benefit in terms of the interest rate and the value of the monthly installment, meaning that the conditions must be better and reduce the financial burdens, not increase them.”

Youssef explained: “The process of transferring the debt includes early repayment fees for the Alawwal Bank, and transaction fees for the new bank, in addition to calculating additional interest if the customer chooses a (grace period) before repaying the new loan, and what follows is an increase in the repayment period, and sometimes an increase in the monthly installment, so the customer may find himself facing a debt that is larger in terms of duration and value.”

He specified the cases in which the decision to transfer the debt is correct from a financial standpoint. He said: “The transfer of debt becomes a correct financial decision, if the interest in the new bank to which the debt will be transferred is less than the current bank, and if the duration of the loan is not extended in a way that increases the total cost, and if the total fees are less than the savings achieved from the reduction in interest, and if the goal is to reduce the burden of the monthly installment to improve the financial situation, without significant inflation in the total debt.” He added: “If the goal is only to obtain a ‘rest period’, the decision may turn into a long-term burden.”

The biggest temptation

For her part, banking expert, Sheikha Al-Ali, said: “The grace period before the start of payment of installments in the event of transferring the debt is the greatest temptation in which banks compete, and it ranges between two and seven months without payment of installments or burdens, but the customer must realize that there is interest that banks calculate on this extension and postponement, whether at the beginning of payment or over the life of the loan, in addition to fees amounting to 105 dirhams for each postponement.”

She added: “Many customers imagine that the bank only charges a postponement fee, but the reality is that there is an increase in the value of the interest, as well as the amount of the monthly installment, and this clearly appears in the last months of payment, as the customer expects a specific date, while the bank extends the period due to the postponement, and thus the amount received is greater than what was agreed upon upon contracting.”

Al-Ali continued: “The essence of banks’ activity depends on (accumulated interest), meaning that the longer the loan lasts, the greater the interest earned. Therefore, extending the repayment period, even if this is accompanied by a slight reduction in the value of the installment, means in practice an increase in the total cost of the debt. Therefore, the customer is advised to know the total cost of the loan after adding all fees and interest, and to make a detailed table before and after transferring the debt, and to compare the total amount due in both cases.”