Personal loans are a good way to get cash on the double for whatever you may need it for. But for many, the need may come at a time where they are simply too hard-pressed to pay much attention to terms and conditions.
The good thing about personal loan products is that they seldom differ. For almost every personal loan; there are only five salient questions you need ask yourself and the bank in question to get the information you need to make a decision.
Personal loans can come with quite a few fees, charges and some high interest rates. Consider if there is no other option besides a personal loan at present. If it is not an emergency; consider saving up over a period of time or if that isn’t an option; refinancing property could provide additional cash at a lower interest rate (but you will still be charged legal fees for a new loan agreement!).
Credit cards may have a higher interest rate but there is the added flexibility of repaying everything within a shorter period without a penalty fee.
Before even considering the technicalities of a personal loan, ask yourself if you’ve truly exhausted every other way to obtain the money.
For some personal loan products; loans are only given to those with a fixed deposit, investment fund, unit trust or some other account (such as a savings or credit card) with the bank in question. Sometimes it isn’t so much a pre-requisite for approval but a way to get a loan with a lower interest rate.There are also loans specially for civil servants or government-linked company workers. Find the best loan for you.
For most people, loan tenures are unlikely to be just a year and thus, it will be important to consider how much interest you will be paying for the whole duration of the loan.
New Bank Negara guidelines have reduced tenures of personal loan financing to 10 years. However, most loans to non-government sector employees are not affected as tenures are usually capped at 7-8 years. Even at this number; the level of interest paid for a 6 year loan can be extremely high.
Typically, a loan amount of RM10,000 with a 9% p.a. interest rate will cost you the following amount in interest depending on 2, 4 or 6 tenure.
For each year, the interest rate will be calculated based on the opening amount and not the remaining balance for most personal loans[1]. As such, you will be charged the same amount of interest every year no matter how much of the principal you’ve repaid. As illustrated above; a six year tenure for an RM10,000 loan is charged interest up to more than half the borrowed amount. However, the repayment monthly only differs by a small amount. Paying off your loan in two years saves you RM3600[2]. Stretching out your loan for a longer tenure can make the monthly payments more affordable but total cost of the loan goes up significantly.
Here’s a graphical look at the reduction of monthly repayment versus the increased interest rate:
Looking at the interest charged above; if you can afford to repay your loan quickly, it would be advisable to do so. Consider all commitments. 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 defaulting.
Many are shocked to find that the disbursed loan amount is lower than what they had applied for after deducting the banks ‘fees and charges’. If you were to apply for a loan at exactly the amount you require; 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 in insurance premiums. Always check the bank terms for one or more of these most common fees and charges:
1. Processing fee
2. Stamp duty
3. Early termination fee
4. Late payment penalty fee
5. Insurance fees
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.
[1] Very few personal loans work on a reducing balance method. Do check with the bank of choice which method they would employ to calculate your interest.
[2] Based on a comparison with a six year loan.
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