How Do Personal Loans Work?

When compared to other types of loans such as car loan, housing loan and etc., personal loans are considered one of the easiest and most convenient loan to apply for as you can get your personal loan application approved as fast as within a day. While other loans such as car loan and housing loan have a pre-determine use for the loan amount, a personal loan is a cash loan where you can spend the money on anything from home renovations, car repair bills to debt consolidation. Below is a list of few things that you need to know when it comes to applying for a personal loan package from a bank or a money lender.


Interest Calculation

The interest rate of a personal loan is calculated on a flat rate method, an interest rate calculating method that requires you to pay the interest based on the whole loan balance throughout the loan duration. Therefore, the effective interest rate for a personal loan is between 1.7 to 1.9 times of the interest rate that is stated. For example, the accurate interest rate for a personal loan that is 9% per annum over 5 years is 15.39% in effective interest rate calculation.


Loan Size and Eligibility

The loan size of a personal loan can range from as low as RM2000 to as high as RM250000 depending on your monthly gross income or yearly gross income level. The minimum monthly gross income is usually RM2000 although some banks may require a higher amount. Assuming if you happen to take a joint name loan, the bank or money lender will also take the other borrowers’ earning power into consideration as well. In general, the applicant or applicants must be at least 21 years old and must not exceed 60 years old by the end of the loan tenure.


Collateral and Guarantor

If a personal loan requires any form of collateral such as a house pledge or a car pledge or a guarantor, that personal loan is defined as a secured loan while personal loans that do not require any forms of collaterals or guarantors are defined as unsecured loans. While secured personal loans allow you to enjoy cheaper and better interest rates, you may also face the risk of losing your collateral should you default on your monthly loan payments. In general, most of the personal loans packages offered by banks in Malaysia are unsecured and hence they do not require any form of collateral or guarantor. It is also strongly advised for you not to act as a guarantor for anyone because it comes with heavy responsibility should that person default on his or her monthly loan repayments.


Financing Methods

There are two types of financing methods for personal loans in Malaysia and they are conventional financing and Islamic financing. Each financing method has its own pros and cons.


Government Linked Companies and Government Employees

Some personal loan packages are only exclusively offered to employees working in the Government sector and Government Linked Companies. If you are working in any of these two sectors, you are eligible to apply for these personal loan packages as they typically come with better interest rates. However, you will need to allow for your monthly salary to be deducted through Angkasa, Angkatan Koperasi Kebangsaan Malaysia Berhad for the loan repayments.


Banks and Non-Banks Lenders

In Malaysia, there are two major types of lenders and they are known commercial banks and licensed money lenders. In general, the interest rates offered by commercial banks such as Maybank, CIMB, RHB, Hong Leong, Alliance, Standard Chartered and etc. are typically cheaper when compared to licensed money lenders. In addition, you can also be certain that the debt recovery will also be done using proper and legal methods. In spite of this, the qualifying criteria are more stringent for commercial banks. There are about 3000 licensed money lenders in Malaysia and their main purpose is to cater to customers that cannot qualify for a personal loan from commercial banks and the interest rates charged by these money lenders are around 12% per annum or typically advertised as 1% per month for secured loans and 18% or 1.5% per month for unsecured loans. It is also important to know that these are the maximum allowable charges specified in the Money Lenders Act 1951. As a word of caution, some of these licensed money lenders will usually find ways to include other types of charges to profit more.


Things to Watch Out For

Below is a list of things that you have to pay special attention to in order not to risk having to pay more than you are required to:

  • Processing fees
  • Documentation fees
  • Stamp duties
  • Early settlement fees or penalties
  • Unlicensed money lenders that are not regulated by the government


Personal loans may offer the flexibility and quick approvals but they come at a cost, higher interest rates. Make sure that the reason for the personal loan is to cater for a need rather than want as you do not want to take on more debts without any compelling reasons.


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