Understanding Gratuity
Gratuity is something every employee is interested in knowing about. It is a certain amount of money paid for continuous service of the employee. This amount is paid by the employer to the employee.
Generally it is paid during the retirement period once the services of employees are completed it will be paid to the employee as per the UAE labor law.
It is like a thanksgiving amount paid to the employee by the employer for their dedication, hard work and employment service. The calculation of amount depends on the base salary and number of years of service.
Can Employee get Personal Loan against Gratuity
Personal loan is a financial assistance which provides relief during any financial crisis. The personal loan can be used for paying off any debt, meeting any emergency requirements, any life events and much more.
The importance of personal loan has become more in recent times. Personal loans are flexible, easy to repay in installments and rate of interest is reasonable and affordable.
Personal loan against gratuity is a form of secured loan issued in the UAE. An employee will be allowed to apply for a loan against gratuity. There are some documents which are required to be submitted for getting this loan. Documents such as letter of undertaking, security cheque and personal guarantee form are required for getting the loan.
The team will process the application and issue a loan based on the gratuity. Once the loan is issued the borrower should start paying the monthly installments. If the borrower fails to repay the loan there will be strict actions taken by the authorities. These may include issuing arrest warrant, encashing cheques, ban on travels, seizure of properties depending on case to case and severity of the default.
Letter of Commitment
Since this is a kind of secured loan all the documentation and paper work will begin from the office. The lending institutions will need a letter of commitment from the borrower stating that the loan will be paid off in full. If the loan is not paid, service benefits will not be provided. This document is in personal loan agreements which is approved by UAE’s Central Bank. It will provide the right to demand for the employer in repayment of the loan process.
Click here for Letter of Guarantee in the UAE
Legal implications
The central bank of UAE has provided the provision under Civil Procedures Law under regulation No 19 of 2011 and Notice#3692/2012 the financial considerations and their regulations.
An employee can go to the bank and apply for a personal loan asking to secure gratuity and issue a loan. Under Article 2(a) of Central Bank Regulation No 19 of 2011 the Gratuity will be considered as a collateral and loan will be issued by the bank.
The salary amount and the gratuity will be taken as security and a loan will be issued. The borrower’s employer providing a letter of commitment is an important document which is verified by the bank.
Required Documents
Below are the documents required for obtaining the Loan against Gratuity.
Undertaking Letter– This letter is issued by the employer to the bank and it states that the employer agrees to transfer salary amount and end of services to the bank until the loan amount has been fully paid off and closed.
Letter of Commitment- This letter is a guarantee provided by the employee to the lending bank that the loan will be repaid in full.
Security Cheque– Borrower should provide security cheque and this will be encashed if borrower goes default on loan payment.
Click here for How to use a personal loan?
What will happen if the loan goes default?
If the loan goes default then the following actions will be taken by the lending institution.
Cheque encashment- The security cheques will be encashed by the lending institution and if there is no balance in account then legal action will be taken on the borrower.
Travel Restrictions- If the debt amount is more than AED 10,000 then the bank will request court for a travel ban. No travel is permitted as a legal case will be filed against the borrower.
Legal Cases- Bank will have the option to file a Civil case or a payment order case against the borrower for defaulting the loan.
Take away
Personal Loan against Gratuity is a good option for the employee as it is a secured loan. Banks will come forward in issuing this loan as it is backed up by the employer. There are legal remedies available for the bank in case of default. Borrower should repay the loan as per the terms and conditions of loan agreement if defaulted then salary and end of services will take a hit with legal implications.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
