The Basics of ASB Loans
Like the ASB fund, ASB loans are only open to Bumiputeras. After submitting all income documents to the lending bank, the customer will have to open an ASB account with the bank. Once the loan application is approved, the lending bank will credit the loan amount directly into the customer’s ASB account.
Every month, the investor (who is the borrower) has an obligation to repay in monthly installments. Additionally, some management and documentation fees might be charged by banks when applying for an ASB loan.
ASB loans are basic term loans, and interest charged on ASB loans is calculated using the reducing balance method (similar to those used by Housing Loans and Fixed Deposits). Most ASB loans today use floating interest rates, so interest rates will change according to BLR.
Much like mortgage insurances, customers can choose to cover their ASB loans with insurance / Takaful that is financed by the banks. These insurances will cover the remaining loan amount in the event of death or total permanent disability (TPD).
There are no penalties on the early settlement by the borrower as long as it is not within the lock in period. The borrower is only required to settle off the remaining loan balance. But an exit penalty is imposed if the loan is settled within the lock in period.
However, do note that do note that unlike semi-flexi home loans, ASBs loans are basic term loans. Extra payments in monthly installments do not lower the interest payable.
Where to Get an ASB Loan
In Malaysia, some of the banks that are agents for ASB funds also provide ASB loans. At this time of writing, only 3 banks offer ASB loans:
Comparison between using savings and ASB loan
Compared to using your own cash on hand to purchase ASB units, there are certain differences in mechanism when taking an ASB loan. The table below provides a comparison overview:
|Own Money||ASB loan|
|Minimum Investment Size||Minimum investment RM10||Minimum loan amount RM10,000|
|Maximum Investment Size||Limited by cash on hand & ASB investment limit||Limited by borrowing power & ASB investment limit|
|Return||Not leveraged, but higher margin||Leveraged returns, but lower margins|
|Additional Costs||None||- Cost of financing (ASB loan)
- Documentation & Management Fees
|Interest Rate Risk||None||BLR movement will affect cost|
|Lock In||No lock in. Can redeem units for cash at any time.||Lock in period (usually 2 years and above) where units bought using ASB loans cannot be redeemed.
But investors may cash out yearly dividend
Should you use ASB loans instead of using cash?
The short answer is YES. Based on historical returns of ASB funds, the fund has never posted a return below 8.55% p.a. since its inception. And unless the fund underperforms by a huge margin in the coming years, ASB loans would make lots of sense
To illustrate, assume Mr. Johan can save RM10k a year to invest in ASB. At the same time, based on his credit profile, his borrowing ability is up to RM200k. The table below is a comparison between using his own savings to buy ASB units without a loan, versus taking an ASB loan for 20 years.
|Year||Own Cash||ASB Loan (5.5% p.a., 20 yrs)|
|ASB Units||Cash Outlay||Return (8.5%)||Cash Gain||ASB Units||Cash Outlay||Return (8.5%)||Cash Gain|
|Total Cash Return:||(RM21,500)||Total Cash Return:||RM9,814|
As can be seen from the table, Johan would be able to use the cash from his ASB dividends at the end of the year to pay off the loan installments in the following year and still have some to spare. The only drawback is that he would spend more in the 1st year of the loan, a small sacrifice to pay, considering that he stands to earn money for as long as he still has ASB units.
If Johan invested only with his own money, the dividends he would get is much less than if he used ASB loans to buy additional ASB units. Additionally, it is not a certainty that Johan is able to save the RM10,000 every year .
How good is that?
Investing using ASB loans to purchase ASB units is a good choice, as long as you are prepared to fund the loan installments in the first year. And once you have decided, remember to use out ASB Loan Comparison tool for the easiest and fastest way to get your ASB loan approved!