Understanding interest rates & late fees

What are interest rates?

Interest rate: The percentage of the principal (the original amount borrowed) that a lender charges for the use of its money. This rate is applied over a specific period, typically annually.

• Fixed interest rates:
  • The interest rate remains the same throughout the loan term.
  • Consequences: Even with a fixed rate, missing payments can result in accumulating interest, increasing your overall debt.
• Variable interest rates:
  • The interest rate can change based on market conditions.
  • Consequences: Missed payments can lead to interest rate hikes, which means your debt can grow faster than anticipated.

How unpaid debt impacts interest rates

• Compounding interest: When you miss payments, interest can be compounded, meaning you are charged interest on the interest already added to your debt. Over time, this can lead to a significant increase in the total amount you owe.
• Increased costs: Higher interest rates due to missed payments can substantially increase the overall cost of your debt. As interest accumulates, it can become increasingly difficult to manage and repay your debt.

What are fees?

Fees: Additional charges imposed by lenders that can increase the cost of borrowing.

Common types of fees:

• Late payment fees:
  • A fee charged when you fail to make a payment by the due date.
  • Consequences: Regularly missing payments can lead to a build-up of late fees, adding to your debt burden.
• Over-limit fees:
  • Fees charged if you exceed your credit limit.
  • Consequences: Continuing to use credit irresponsibly can result in these additional fees, increasing your debt.
• Penalty APRs:
  • A higher interest rate applied to your account after late payments.
  • Consequences: This can significantly raise the cost of your debt, making it harder to pay off.

The consequences of unpaid fees

• Accumulating fees: Unpaid fees can quickly add up, increasing the principal amount of your debt. This can result in a cycle where fees lead to higher debt, which then incurs more fees.
• Negative credit impact: Regularly missing payments and accruing fees can severely damage your credit score. A lower credit score can affect your ability to obtain new credit or loans in the future.

The snowball effect of unpaid debt

• Increasing debt load: As interest and fees accumulate, the total amount you owe can grow exponentially. What might start as a manageable debt can quickly become overwhelming.
• Legal actions: Persistent non-payment can lead to legal actions from creditors, including lawsuits and wage garnishments. In extreme cases, assets may be seized to recover unpaid debts.

Strategies to avoid the consequences of unpaid debt

• Communicate with creditors: Explain your situation and negotiate for lower interest rates or fee waivers. Many creditors are willing to work with you to find a manageable repayment plan.
• Seek professional help: Organisations like Eltezam can provide guidance and support to help you manage and resolve your debt. Professional advice can help you understand your options and take appropriate action.
• Budget and plan: Create a budget to ensure you can meet your debt obligations. Prioritise debt repayment to avoid accumulating interest and fees.

How Eltezam can help

Eltezam, a debt collection agency in the UAE, is dedicated to helping individuals manage and resolve their debt. By understanding interest rates and fees and exploring payment options, you can take control of your financial situation and avoid the severe consequences of unpaid debt.

Understanding the impact of interest rates and fees on unpaid debt highlights the importance of managing your debt responsibly. Taking proactive steps to address your debt can help you avoid compounding interest, accumulating fees, and the resulting financial hardships.