Interest Calculation
Unlike home loans which follow the reducing balance method – personal loan interest calculation follows the flat interest rate method. As a rule, the effective interest rate of a personal loan is 1.7-1.9x of the stated interest rate. So the true cost of a personal loan that is said to be 9% p.a. over 5 years is actually 15.39% in effective interest rate.
Eligibility and Loan Size
You can get a personal loan for as little as RM 2,000 to as much as RM 250,000, depending on your income level. If you take a joint name loan, the earning power of all the borrowers are also taken into consideration.
Collateral vs Un-collateralized
A loan which requires collateral (E.g. House, car, FD pledge) or a guarantor is known as a secured loan, whereas a loan that does not require collateral is known as an unsecured loan. Secured loans have cheaper interest rates, but you may run the risk of losing your collateral should you default. Most personal loans offered by Malaysian banks are of the unsecured type and hence do not require collateral.
Islamic vs Conventional Financing
In Malaysia, much like other banking products, there are options for Conventional or Islamic financing for personal loans.
Government Employees and GLCs
If you are a Government employee or employed in a Government Linked Company (GLC) you are also eligible to apply for personal loan packages designed specially for civil servants and GLCs. These typically offer better interest rates, but will require you to consent to monthly salary deductions via Angkasa to repay the loan.
Bank vs Non-Bank Lenders
There are 2 major types of Lenders that provide personal loans in Malaysia. The first are the commercial banks that most people are familiar with (Maybank, RHB, CIMB, Standard Chartered, Alliance etc.). For most people, this is the preferred route for borrowing, as the rates offered by banks are typically cheaper compared to alternative lenders. Additionally, in the event of debt recovery, one can be certain it will be done via proper legal methods. However, qualifying criteria for banks are comparably more stringent.
For people who cannot qualify for a personal loan from banks, there is the option of getting them from licensed money lenders. Governance of licensed money lenders and pawnbrokers falls under the jurisdiction of the Ministry of Housing & Local Government (not Bank Negara or Ministry of Finance). There are about 3,000 Licensed Money Lenders in Malaysia.
The interest rates charged for a personal loan from such lenders are typically 12% p.a. (usually advertised as 1% per month) for a secured loan, and 18% p.a. (usually advertised as 1.5% per month) for an unsecured one. In fact, these are the maximum allowable charges as stipulated by the Money Lenders Act 1951. However, beware that such lenders usually find ways to include in other types of charges.
Watch Out For
- Processing / documentations fees / stamp duties. Some banks offer waivers.
- Early settlement fees / penalties
- If you want to do an early settlement of your personal loan, the settlement amount is not the remaining loan amount, but is calculated using the Rule of 78
- Unlike mortgage loans, you do not save any money by paying extra to your personal loan
- Never borrow money from an unlicensed money lender!
Conclusion
Personal loans offer the advantage of flexibility, and quick approvals. However, one must contend with the higher interest rates that come with it. At the end, one must remember that saving for a need is better than borrowing for it. Even though personal loans are easy to get, one should be wary of taking on more debt without a compelling reason.
Remember to make use of Loanstreet's Personal Loan Comparison tool to find the best personal loan for your needs.
