What are the Types of Personal Loan Available in Malaysia?
There are 2 types of personal loan in Malaysia.
1. Secured Personal Loan
These personal loans are backed with a guarantor or collateral in the form of a fixed deposit account, property or unit trusts attached. This is to serve as another layer of security should the loan applicant fail to make repayments.
In such circumstances, the banks have the right to seize the collateral or shift responsibility of repayment to the guarantor. Secured personal loans cater to applicants who do not have a good credit history, but it can also be used to secure lower interest rates on personal loans.
2. Convenient Personal Loan
A more common type of personal loan which does not require the applicant to pledge any collateral or guarantor. Unsecured personal loans are generally for people who need cash in advance and urgently.
Therefore, the application and approval process for unsecured personal loans is generally faster. While it’s convenient, unsecured personal loans come with higher interest rates.
Which One is the Best Personal Loan for Me?
It depends on where you stand financially and how urgent you need the cash. If you require emergency cash to foot a huge unforeseen bill and you are confident that you’re able to pay it back in the next couple of years, an convenient personal loan is your best bet. But if it’s to purchase something you can’t afford, taking a personal loan is not only unwise but rather irresponsible.
Apart from personal loans, there are other categories of loans you can apply for if you want to make a big purchase such as a house or car. This way, you don’t have to dig deep into your savings, which can be used for more fruitful investments.
When Should I Get a Personal Loan?
You may need to apply for a personal loan in different phases of your life. Here are a few life stage scenarios in which applying for a personal loan will help you financially.
I am a working student and interested to further my studies.
Taking up a personal loan for prospective working students makes the most sense since there is a requirement of a minimum annual income.
You are free to choose whichever course to enroll in at many universities. Having said that, the course should be accredited and the university is a reputable one.
Bank disbursed the full borrowing amount to you at one go, so you can plan out the payment of your fees. Do also remember to set aside some funds for other expenses such as books, transportation as well as visa and flight tickets (if you are studying abroad).
I am recently engaged and want the wedding of my dreams.
Congratulations! Wedding expenses are expensive but because it’s a once in a lifetime event, many are willing to pay extravagantly for the wedding of their dreams.
Personal loan comes with flexible repayment, which gives you the flexibility for any fine-tuning on your budgeting. On top of flexible repayments, personal loans can be affordable with relatively low-interest rates and long repayment terms.
I am buying my first home and there is some renovation work to be done.
A down payment is required for you to secure a property you are eyeing on. You may not have enough in your savings account and you don’t want to miss the opportunity in buying the perfect home, hence a personal loan is a mighty solution for you.
As mentioned, banks give you your borrowing amount in one lump sum so it is up to you on how you want to spend them. Set aside budget with a little extra for your home renovation and interior design.
Okay, now I have multiple debts. I want to consolidate my debts into a single loan.
Debt consolidation is best for those who have multiple debts on credit cards, car loan and home loans with different repayment terms and interest rates.
Using a personal loan, the bank will buy and combine all your existing debts from other creditors into one separate single loan and in exchange, you will only have to repay one total amount with one repayment period to only one bank. This simplifies debt repayment for you and on top of that, you get to build good credit by being a good paymaster (someone who pays monthly installments on time).
Also, because debt consolidation spreads out your total repayments over a longer period, the interest rates are lower. With that, you are able to have some savings especially when your other debts have higher interest rates. A good example would be that credit cards’ interest rates are typically between 15% - 18%, while personal loan interest rates can be significantly lower.
I am expanding my business.
Sometimes you will require extra capital especially when your business is expanding and cash flow is interrupted. Getting a personal loan with easy application and at affordable rates is a great solution to help you out. Besides, a personal loan is typically an unsecured loan which means that you do not need a guarantor or collateral for your loan. So in an unforeseen event that you default on repayment, you won’t risk burdening a relative or a friend and losing an asset.
Debt Consolidation: Personal Loan vs Balance Transfer
When you have multiple debts of different sizes, banks, due dates, tenures, and interest rates, it can be a strenuous task to keep track of the repayments. A debt consolidation loan is great for managing multiple outstanding debts. For instance, you can consolidate more than one credit card debts of RM15,000 and a personal loan debt of RM10,000 into one RM25,000 loan.
By combining your debts into one loan facility, you can simplify repayment at your comfort level. With a lower interest rate and longer tenure, you can pay lower monthly installments and have more disposable income.
In terms of considering the type of debt consolidation loan, you will commonly be presented with two options - personal loan or balance transfer. Although they both have competitive interest rates, however, they work differently.
What are the Things to Look Out for When Applying for a Personal Loan?
All the financial terms and jargon can be intimidating and often overwhelming. Let us help you with some or a few common terms which could get you some relevant and important information.
Here are some commonly used terms in personal loans:
Per annum (p.a.)– The amount of interest rate you will be charged per year for the duration of your loan. For example a RM10,000 loan at 11% p.a. stretched out over five years will amount to RM5,500 in interest charges. This means you will have to pay back RM15,500 in the course of five years. The longer it takes to settle your loan, the more you will have to pay.
Principal– The initial amount of money that you loaned. Going by the same example above, the principal amount would be RM10,000.
Tenure– The period of time you are expected to pay back your loan in full. The longer your tenure, the more interest you have to pay.
Installment– The amount you have to pay each month. This is calculated based on the principal plus interest divided by the number of months in your tenure.
Default– In banking terms, it means that a person has failed to pay their monthly installments. This is a scenario we want to avoid.
Penalties– In the event that you are unable to make your monthly installments, you will be penalized with additional charges. Most banks apply a 1% penalty but always check beforehand!
How Do Banks Decide to Approve or Reject My Application?
Banks place high consideration on whether you can repay the debts by using a debt service ratio. The debt service ratio basically determines the amount you can borrow.
Here’s how to calculate the debt service ratio:
Total Monthly Expenses / Total Monthly Net Income x 100% = Debt Service Ratio
Best chances of personal loan approval = Below 60%
Total Monthly Net Income: RM5,000
Total Monthly Expenses: RM3,000
Based on the calculation above, your debt service ratio is 60%.
To increase the possibility of loan approval, net income has to be significantly higher than expenses every month.
Hence, banks also consider your credit history when reviewing your loan application. A credit history shows a record of your debt repayment, which indicates your ability to commit to repayment.
Your credit history can be found in your credit report provided by Bank Negara Malaysia which reveals greater insights into your spending habits. To determine an individual’s credit-worthiness for loan eligibility, banks also refer to the Central Credit Reference Information System (CCRIS) which is managed by the Credit Bureau of Bank Negara Malaysia. The credit report provided by CCRIS contains all credit information from all financial service providers in Malaysia.
The other credit report that banks use is by CTOS Data Systems Sdn Bhd (CTOS) which is privately managed and they collect your information from public sources. The main information derived by the credit report generated by CTOS is your credit score.
What are the Documents Required to Apply for a Personal Loan?
To smoothen the process of your loan application, make sure that you’ve compiled all of the required documents. Depending on the bank, the required documents will differ from one bank to another but you can find the general information below.
Will My Credit Score Affect My Personal Loan Application?
Yes, credit scores are decision-making tools that play a role in helping banks decide whether you are qualified for a personal loan.
A credit score is a 3-digit numerical rating where a good credit score can increase your chances of getting a loan approved with better interest rates and faster loan approval.
Score | What it means to lender?
744 - 850 Excellent! You’re viewed very favourably by lenders.
718 - 743 Very Good! You’re viewed as a prime customer.
697 - 717 Good! You’re above average and viable for new credit.
651 - 696 Fair. You’re below average and less viable for credit.
529 - 650 Low. You may face diﬃculties when applying for credit.
300 - 528 Poor. Your credit applications will likely be aﬀected.
No Score Your score couldn’t be generated due to insuﬃcient information.
4 Questions to Ask Yourself Before Applying for a Personal Loan
#1: Is a personal loan necessary?
As they come with several fees and charges, on top of high-interest rates, consider if there is another option besides a personal loan at present. Can you use your savings? Is it possible to pay with a credit card? Would a credit card balance transfer help?
If you have no other possibilities to get cash other than a personal loan, then you will need to consider the technicalities of a personal loan once you get down to it.
#2: How much interest will I be paying?
Here’s an example of a loan amount of RM10,000 with a 9% p.a. interest rate with varying tenures:
For 24 months repayment:
Principle = RM10,000 / 24 = RM416.67 / month
Interest 9% = (RM10,000*0.09)/12 = RM75 / month
Installment = RM491.67
Total interest = 24*RM75 = RM1,800
For 48 months repayment:
Principle = RM10,000 /48 = RM208.33 / month
Interest 9% = (RM10,000*0.09)/12 = RM75 / month
Installment = RM283.33
Total interest = 48*RM75 = RM3,600
For 72 months repayment:
Principle = RM10,000 /72 = RM138.89 / month
Interest 9% = (RM10,000*0.09)/12 = RM75 / month
Installment = RM213.89
Total interest = 72*RM75 = RM5,400
Since the interest charge is calculated based on the principal amount, you will be charged the same amount of interest every year no matter how much of the principal you’ve repaid. As illustrated above, the interest charged on a six-year tenure for an RM10,000 loan is more than half the borrowed amount – even though the monthly repayment between 4 and 6-year tenures differs by only a small amount.
#3: How much should I repay every month?
Looking at the interest charged above, if you can afford to repay your loan quickly, it would be highly recommended to do so. Consider all commitments and find a figure you’d be comfortable with. However, if the minimum is all you can afford to repay, it will be inevitable to choose the longer repayment schedule: paying more interest but with a lower risk of default.
#4: What other fees and charges will I incur?
Many are shocked to find that the disbursed loan amount is lower than what they had applied for after deducting the bank’s “fees and charges”.
If you were to apply for a loan at exactly the amount you need, the shortfall may cause some inconvenience. There may also be penalties for early settlement or late payment. Some banks even require that you take out Takaful insurance on the loan and this will cost you a tiny bit more every month. Always check the bank terms for one or more of these most common fees and charges:
Early termination fee
Late payment penalty fee
Personal loans can become an even bigger burden than any other loan product because of late payment fees and high-interest rates. Always consider these four vital points before signing on the dotted line.