What Constitutes an Event of Default for a Loan?
Posted On July 27, 2013
According to the UAE Central Bank, under an event of default, a bank can claim immediate repayment of outstanding loan installments and interest, in addition to any other fees or expenses, without providing any notification or obtaining a court ruling.
The following events constitute an event of default:
The borrower is terminated for any reason from their work.
Transfer of the monthly salary of the borrower or any part of it to another party without the written consent of the bank if the loan has been granted against the borrower’s salary (i.e. Salary Transfer).
Breach of commitments or obligations which have been included in the contract of the loan.
Failure to pay three consecutive installments or six non-consecutive installments.
Borrower has provided incorrect information or documents to the bank.
Borrower leaves country permanently.
Death of borrower.
At its own discretion, the bank may obtain life or disability insurance to settle the loan amount; the borrower is usually required to pay an insurance fee for a personal loan that varies between 0.25% to 1%.
If a borrower defaults on a loan, the bank can open a criminal case against him or her. If the borrower has provided the bank with a blank cheque against the loan, the lender can cash it. Given that a bounced cheque is a criminal offence in the UAE, the debtor will have committed a crime if this occurs, and can face jail time. A common misconception is that after serving the prison term, the defaulter can pay their fines and their debts will be erased. Unfortunately, this is not the case; improsenemnt and fines are a penalty for committing a crime (i.e. bounced cheque). Banks will still be entitled to collect their money from the defaulter.
Alternatively, the lender can open a civil case against the borrower, in which case a court can pass down a judgement on the defaulter. In many cases, a travel ban can be imposed on the loan or credit card defaulter, in which case they can not leave the UAE till all their debts and court cases have been settled.
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