Flat rate vs reducing rate
UAE banks advertise personal and car loans with two kinds of rate, and they are not comparable at face value. A flat rate charges interest on the full amount you borrowed for the entire term, even though you repay part of it every month. A reducing (or declining) balance rate charges interest only on what you still owe, which is how mortgages and most loans elsewhere work. For example, AED 100,000 at 5% flat over 4 years costs AED 20,000 in interest and AED 2,500 a month. The same instalment on a reducing basis is about 9.24% a year. So a 5% flat offer is more expensive than a 7% reducing one. Always compare the reducing rate, which this calculator shows for every loan.
How the monthly instalment is calculated
For a flat rate, the interest is the amount times the rate times the number of years, and the amount plus that interest is split into equal monthly payments. For a reducing rate, the calculator uses the standard instalment formula, where each payment covers that month's interest on the remaining balance and the rest reduces the balance. Early payments are mostly interest and later ones mostly principal, which you can see in the yearly schedule. Both methods give a fixed monthly payment, so the only real difference is the total cost.
UAE Central Bank limits
The UAE Central Bank's rules on retail loans cap a personal loan at 20 times your monthly salary (or income) and its repayment period at 48 months. Car loans can run for up to 60 months, and the bank can usually finance up to 80% of the car's value. Your total monthly repayments on all loans and cards should not exceed 50% of your salary, which is called the debt burden ratio. Banks apply these rules strictly and add their own criteria, such as a minimum salary and an approved employer list, so treat the checks here as a guide.
Costs the instalment does not show
The monthly instalment is not the whole cost. Banks usually charge a processing fee of up to 1% of the loan, life insurance on the borrower, and for car loans comprehensive insurance on the car. Paying off a loan early can carry an early settlement fee, which the Central Bank caps at 1% of the outstanding balance. Salary transfer loans are often cheaper than non-salary transfer loans. Ask each bank for its full schedule of charges and the annual percentage rate before you sign.
Islamic finance
Islamic banks offer the same products through Sharia-compliant structures such as murabaha, where the bank buys the item and sells it to you at a fixed profit, or ijara, a lease. Instead of interest they quote a profit rate, usually as a flat rate. The calculation of the monthly payment is the same, so you can enter the profit rate here as a flat rate to compare it with a conventional offer.