Need Cash Without Losing Your Savings? Consider a Passbook Loan!

If you are exploring options for financing an expense or trying to improve or establish your credit score, a passbook loan might be a good option. Passbook loans in UAE offer great features such as lower interest rates. These loans are secured by your savings, which makes them a safer option for both the lender and the borrower.

To help you make an informed decision and learn more about passbook loans, keep on reading below! You'll discover how these loans work, their benefits, and whether they are the right choice for your financial needs.

What are Passbook Loans?

Passbook loans, also known as share-secured or savings-secured loans, are a type of loan where your own savings are collateral.

Simply put, you can borrow money against the balance in your savings account. If you fail to repay the loan, the lender can take money from your savings to cover the unpaid amount.

Passbook loans are often used by people looking to improve or build their credit scores because these loans have more flexible qualification requirements. Additionally, your payment history on a passbook loan may be reported to AECB — this helps in boosting your score if you make consistent, on-time payments.

Overall, passbook loans are generally safer for both the lender and the borrower due to the collateral.

How Does a Passbook Loan Work?

Here’s how a passbook loan in UAE usually works -

Suppose you need a loan and have AED 27,000 in your savings account. You can apply for a passbook loan with a bank that offers this service, such as Emirates NBD or other major UAE banks.
The bank will use your savings account as collateral. This means your AED 27,000 remains in your account, but it is frozen and cannot be accessed until the loan is repaid.
Generally, you can borrow up to 90% of your savings balance. So, as per our example, if you have AED 27,000, you might be able to borrow up to AED 24,300. The loan amount, interest rate, and repayment terms will be agreed upon later.
Passbook loans usually have lower interest rates compared to unsecured loans due to the collateral provided.
You will make regular payments as per the loan terms. For instance, if the loan term is 12 months with an interest rate of 3%, you will pay monthly instalments that cover both the principal and interest. By making timely payments, you can improve your credit Score.
Even though your savings account is used as collateral, some banks allow you to continue earning interest on the frozen amount. This can slightly offset the cost of the loan.
If you fail to repay the loan, the bank has the right to take the equivalent amount from your savings account to cover the outstanding balance. It reduces the risk for the bank and helps you to get better loan terms.

Pros and Cons of Passbook Loans

Pros of Passbook Loans

Easy Qualification: Since your savings account acts as collateral, passbook loans generally have minimal qualification requirements. These loans are accessible even to those with low credit scores.
Lower Interest Rates: Passbook loans offer lower interest rates compared to unsecured personal loans. This is because the loan is secured by your savings.
Credit Building: Regular, on-time payments can help improve your credit score.
Continued Interest Earnings: Your savings account continues to earn interest even while it is being used as collateral. This, in effect, can cut down some of the borrowing costs.
Quick Processing: The loan approval and disbursement process is usually faster since the collateral is already in place with the bank.

Cons of Passbook Loans

Collateral Restriction: Your savings account balance is frozen and cannot be accessed until the loan is fully repaid, which limits your liquidity.
Limited Loan Amount: The amount you can borrow is restricted to a percentage of your savings balance. This limit is generally up to 90%, which may not be sufficient for larger financial needs.
Risk of Savings Loss: If you default on the loan, the bank can seize your savings to cover the outstanding balance.
Potential Fees: Some lenders may charge fees for early repayment or other services associated with the loan. This can shoot up the overall cost.
Impact on Financial Flexibility: If a significant portion of your savings is tied up as collateral, it can limit your ability to respond to other financial opportunities or emergencies.

Are Passbook Loans Available Online in the UAE?

Yes, passbook loans are available online in the UAE. These loans are offered by various banks and financial institutions. You can easily apply for a passbook loan online without much hassle.

The following are the general steps to apply for passbook loans in UAE -

Eligibility Check: You should meet the eligibility criteria set by the bank. The list generally includes having a savings account with the institution and maintaining a minimum balance.
Online Application: Many UAE banks provide online platforms for loan applications. You can visit the bank's website or use its mobile banking app to apply. Note that the application will require basic personal and financial details.
Submission of Documents: You might need to upload necessary documents such as ID proof, savings account details, and proof of income.
Approval Process: Once your application is submitted, the bank will review it. Since the loan is secured against your savings, the approval process is faster and involves fewer checks compared to unsecured loans.
Agreement and Disbursement: After approval, you will need to agree to the loan terms. The loan amount will then be disbursed to your account — your savings balance will be held as collateral.

Note: While online passbook loans offer convenience, it's essential to understand the terms and conditions, including interest rates and repayment schedules.

Check loan eligibility and apply personal loan

When Should I Get a Passbook Loan?

You can opt for the personal loans for the following reasons -

Passbook loans can be a great tool to build or improve your credit score.
If you find it psychologically stressful to see your savings deplete, a passbook loan can help. You can borrow against your savings without immediately reducing your balance, thus providing a psychological cushion while still accessing needed funds.
Passbook loans offer lower interest rates compared to unsecured loans because they are secured by your savings. This makes it a cost-effective borrowing option when you need funds but don’t want hefty interest expenses.
If you have a low credit score or limited credit history, passbook loans can be easier to qualify for since the loan is secured by your savings.
With the help of passbook loans, you can keep your savings intact as an emergency fund.

Frequently Asked Questions

The maximum amount you can borrow depends on the balance in your savings account. Generally, you can borrow up to 90% of your savings balance.

Fees can vary by bank, but some common fees include application fees, processing fees, and early repayment fees. It's essential to check with your specific bank for a detailed fee structure.

Yes, you can usually repay your passbook loan early. However, some banks may charge an early repayment fee. It's best to review the terms and conditions with your bank before making early payments.

In most cases, your savings account will continue to earn interest even while it is used as collateral for the passbook loan.

Not all banks in the UAE offer passbook loans. It is advisable to check with your bank or explore different banks' offerings to find a suitable option.

Yes, expats can apply for passbook loans in the UAE if they have a savings account with the bank offering the loan and meet other eligibility criteria set by the bank.