Personal loans today are the preferred means of short term credit in the UAE. People prefer taking personal loans to using their credit cards for large expenditures like travel, purchasing large business assets, meeting expenses like weddings, college tuition, etc.
Banks that offer personal loans in the UAE do so on the basis of two types of interest rates – flat rates and reducing rates
Flat rate of interest on a loan refers to when the interest and sum payable is calculated at the start of the repayment schedule, and does not change till the loan has been paid off. For example, A loan of AED 12,000 taken for a period of 12 months, means payments of AED 1,000 every month (without interest). Add to this the flat rate of interest at 5%, which equals AED 1,050 per month (with interest), for 12 months, which adds up to a total interest payment of AED600.
Reducing rate of interest on a loan takes into consideration the fact that, after each instalment, the principal amount reduces. The interest percentage (which remains the same) is charged on the reduced amount, every month. Thus resulting in different instalment amounts each month.