When you apply for a loan or some other type of financing in the UAE, you will be asked to have a security check. But how have these cheques been used in the past, and what is the view of the UAE central bank? To prevent any misunderstandings, make sure you understand the basics of security checks the next time you get a loan.
If you take out a loan for AED 100,000 and pay a fixed interest rate of 4% per year for four years, you will owe the bank a total of AED 116,000. Your loan, on the other hand, is paid back in instalments. So, if you avoid making payments at some point, how does the bank cover its expenses and interest income? Here's where security checks come in handy. If you don't make your loan payments, the bank will cash the cheque you gave them.
In the past, it was popular for banks to request blank security cheques from their customers before granting them financing. As a result, banks were free to write any amount on signed checks. This raised uncertainty about how much consumers will be responsible for in the event of a default. When the UAE central bank announced that consumers should not be required to issue blank security cheques by their banks, it helped to clear up the misunderstanding.
Let’s Acknowledge the concept of Security Cheque in UAE
Every bank in the UAE requires a security cheque when providing some form of credit facility, such as credit cards, personal or car loans, or mortgages.
You must supply the bank with an undated cheque that covers the entire credit sum at a minimum. When authorising a loan or credit card, most banks would ask for a security check. These cheques are used in some cases, such as when a loan or credit card holder fails to pay their debt payments. This would be a kind of bank guarantee request for some credit.
A security cheque is nothing more than a routine cheque provided by the cheque holder. The cheque would be signed in favour of the bank and the date would be left blank.
What benefit does this have for the banks?
If a loan holder fails to pay the payments for more than a certain amount of time (typically 3 months), they will usually give the loan holder some friendly reminders, and if the loan holder does not respond, a security check will be used against the loan holder.
Security cheques would be in favour of the banks if the loan holder defaults on the instalment payments. They have the option of depositing the security cheque. If the account has money, the cash will be resorted from the cheque; otherwise, the cheque will be dishonoured, and the drawer will be recorded for a cheque dishonoured scenario.
Previously, banks were required to enter the cheque amount based on the outstanding loan amount, but now, according to the UAE Central Bank, only the date column will be left blank, and the interest and loan amount will be entered on the cheque.