7 Things You Should Know about Personal Loans in Malaysia
There are many reasons why Malaysians consider taking out a personal loan - to buy a car, fund a post-graduate education, or consolidate a loan; the idea is limitless as long as you’re using it wisely.
Personal loans are a good way to get cash on the double for any financial situation you may face. Taking out a loan is a huge responsibility. For example, personal loans which are extended for a defined term will require discipline in paying off the loan in a set timeframe, so you can't just jump in and sign the contract.
The most common personal loans in Malaysia are secured and unsecured loans, and Islamic and conventional loans.
There are plenty of banks that offer personal loans, so before you decide, here are five vital questions you need to consider before making a decision.
Do you need a personal loan?
Personal loans are an avenue to explore if you’re looking for a way to get money. You can’t just simply take out a personal loan just for the heck of it. If your intention is to invest on stocks or commodities, then it’s better not to pursue it. Personal loans are made possible for financial situations like education, emergencies, or hospitalisation.
That’s why it’s better to assess for yourself if you really need a personal loan, since a personal loan is still a debt that comes with fees, charges and some high interest rates. Give yourself time to fully consider the pros and cons of taking out a personal loan. You should also be prepared to pay regularly so you don’t risk falling into debt. Consider if there are no other options available besides taking a personal loan.
Is bank-customer relationship important?
There is a specific relationship between a bank and a customer. This solely depends on the activities, products or services provided by the bank to its customers. This makes the relationship between a banker and its customer a transactional relationship.
For instance, a customer frequently deposits fund and consults his banker. When a trust and relationship is built, banks will offer its customer a wide spectrum of financial products and services that go beyond simple checking and savings accounts.
There are certain personal products that are only offered to those with a fixed deposit, investment fund, unit trust or other accounts like a savings account or a credit card with the bank. This isn’t much of a prerequisite for most but serves as a way of getting a loan with a lower interest rate from the bank. There are also specific loans for civil servants or government-linked company workers.
Your credit score determine if you can afford taking a personal loan
You‘ve probably assessed and decided to take out a loan at this stage, but uh oh, how is your credit score?
In general, your CTOS score ranges from 300 to 850. A very good CTOS score ranges from 718-743, and 744-850 is an excellent. The higher your credit score is, the more favourable you appear to lenders and with that, more affordable rates can be offered to you.
Image source: CTOS
For borrowers with issues on their credit card, the interest rate on a personal loan may be the same or higher than the interest rate on a credit card depending on the bank you’re applying for.
A higher interest rate could mean large monthly payments, which can be difficult to afford and cause you to make late payments or entirely miss payments. This can leave a negative impact on your credit score and will remain on your credit file for seven years.
Tip: When you’re shopping around for the best interest rates available, make sure to compare everything from the interest rate to the total cost of the loan.
| See also: The Ultimate Guide to Credit Score in Malaysia |
Look out for interest rates
If you have a healthy bank-customer relationship, then you’re good. However, if you don’t, you’ll have to look for a bank with the lowest rates. There are plenty of loan deals available, but with so many advertisements around, it may be difficult to differentiate the genuine ones from the inferior ones. Just because they offer a low-interest rate doesn’t mean it’s a good deal.
This can mean that the repayments will carry for a longer period of time. If you find a loan that has a reasonable interest rate and loan term, then you don’t have to hold back on signing those papers.
Check your credit history
Check your credit history first before you apply for a loan. This way, you can pre-assess yourself if you are qualified to take a loan or not. If you have existing loans, it’s better to pay them off before you apply for another loan otherwise you will be rejected and it will only reflect on your financial history.
Potential risks of personal loan
While you can pay off your credit card over an undetermined time, a personal loan must be paid off within a fixed timeline. Since you’re borrowing a large sum of money, there are several risks that you should consider before taking on a debt.
Here are some of the potential risks that you should look out for:
- Penalty Charges
Sometimes a personal loan can be a nightmare if you can’t make your monthly payments. Loans that are not secured by any property can pose problems if you have missed payments. There will be fees for a charge of tenor, late payment, cancellation fees as well as a redemption fee if you pay for your loan early. In fact, some loan agreements include prepayment penalties if you pay earlier than the expected date.
And of course, be careful not to completely miss making any payments because your lender could take you to the court and sue you!
- Decreasing your credit score
Your credit score is one of the requirements of getting a personal loan. When you’re taking out a personal loan, you’re also going to risk your credit score - especially when you don’t manage your finances properly. A downturn in your credit score may affect your future access to credit when you need it the most.
In case you have a low credit score from the start and you still want to take out a loan, credit unions have alternative programs that provide loans at low prices.
- Negotiating terms. If it’s your first time taking out a personal loan - you should be familiar with the negotiating terms. The following terms are negotiable, make sure you don’t approve sub-optimal terms on each:
- Interest rate and how it’s calculated
- Advance rate
- Personal guarantees
- Co-signer requirements
- Up-front fees
- Prepayment fees
- Rescission terms
It’s important to prioritise the loan terms first in your situation. For instance, when you’re negotiating with your terms, is the maturity more important than the lowest rate? Try to look around and find the best deal that best provides the set of terms most suitable for you.
Tip: Try to develop a relationship with at least a few potential lenders. This way, if you have a good credit, most lenders will want your business since they need to make good loans.
- Reduced Financial Flexibility. With great loans comes great financial responsibility. This compromises your ability to meet other obligations you have, if you’re committed to some financial things, perhaps even your ability make ends meet. Instead of having a financial tool to extend your financial options, it will become a debt trap for you. Banks can charge you high interests and fees in these situations.
Tip: Instead of doing all the trouble of writing things down and comparing your options, you can go to GoBear to compare different personal loans.
Compare the best deal
Before applying for a personal loan, find a lender whose product and loan terms match your needs. Look for a personal loan with the lowest interest rates. The lower the interest, the lesser the borrowing cost - but watch out for hidden charges. You can also look for a bank that offers the flexibility you need so you don’t have to pay in hassle.
A personal loan can be a smart financial move, but keep in mind the following things mentioned as it can help you make a smarter decision if you want to take out a personal loan. Don’t just casually walk into a bank and take a personal loan on a whim or you’ll get yourself into trouble!
If you qualify, it’s time to practice good credit habits to ensure that your credit score is as best at it can be. Improving your credit score may increase your chances of getting a better deal with the best set of terms at a lower interest rate.