Facts & Myths: 10 Things to Know About Islamic Personal Loans
There are a ton of misconceptions that surround conventional personal loans and Islamic personal financing. Is one more expensive than the other? Can anyone apply?
These questions and more are about to be answered.
Here are common myths about Islamic personal financing, debunked!
1. It’s only for Muslims
Even though it is called an Islamic personal loan, anyone, whether a part of the Muslim faith or not can still apply! But in any case, all applicants are still subject to things like credit checks and meeting financing requirements in terms of age, employment status and income level.
2. It’s easier to apply or gain approval
In general, the application process is roughly the same for both Islamic personal financing and conventional loans. However, there may be additional documentation requirements depending on the bank you are applying with.
The usual application documents necessary for Islamic financing may include a copy of your identification, your latest salary slip, a confirmation letter from your employer as well as bank statements from the last three months and income tax forms or EPF statements.
As for loan approval, your chances depend on your credit history, income level and employment, just like conventional loans.
3. It costs more than conventional loans
This is also not necessarily true as the loan costs for conventional and Islamic financing differ with providers.
It’s completely possible for your Islamic personal loan to have lower overall costs than a conventional loan (and vice versa). Thus, to get the best deal, it’s a good idea to compare loans and their respective fees, to find ones with the lowest costs.
4. Not many banks offer Islamic loans
Most, if not all, major banks in Malaysia offer Islamic loans! Moreover, you can easily tell which loans follow Islamic principles, based on the name of the loan (even if it does not contain the word ‘Islamic’). All loans ending with the ‘i’ suffix is considered an Islamic loan, e.g. ‘Al-Rajhi Personal Financing-i’ or ‘Standard Chartered Personal Financing-i’.
However, an Islamic bank may or may not affix an ‘i’ to their loan products, since it is accepted that such an institution is providing shariah-compliant financing in any case.
5. You can’t borrow as much when compared to conventional personal loans
The maximum and minimum borrowing amount is set by individual banks. Thus, Islamic financing does not necessarily lend more or less money than a conventional loan.
The borrowing amount in Malaysia for both conventional and Islamic personal financing can start from as little as RM1,000, right up to RM250,000. The amount you are eligible to borrow depends on a number of factors including your income level, credit risk, repayment tenure and others as determined by the lending bank.
6. It has a shorter tenure
Again, this depends specifically on the loan product and provider. Certain banks may offer shorter maximum repayment tenure of just 5 years, whereas other banks may give applicants up to 8 years to repay.
Now that these Islamic personal financing myths have been busted, let’s find out more about the facts:
7. You may have to take up a Takaful plan
With Islamic personal financing, you may be required to undertake a Takaful plan to cover your loan in case your (total permanent) disablement or death leaves you unable to honour repayments.
A Takaful plan is sometimes compulsory and is usually deducted from the loan. It may also be offered as complimentary to your personal financing.
8. It is shariah-compliant
Muslims will be happy to know that Islamic personal loans are fully shariah-compliant! Thus, in addition to being regulated by Bank Negara Malaysia, Islamic personal financing is also governed by a shariah committee that ensures Islamic banking principals are followed. That means no riba (interest), haram business activities, gharar (uncertainty and speculation) or zulm (exploitative practices).
In addition, you may enjoy special benefits under Islamic personal financing that may not be present with conventional personal loans. For instance, with floating profit rate loans, the ceiling rate (the highest the profit rate can go) is protected by the Islamic Base Rate. The same cannot be said for variable rate conventional loans. As mentioned above, a rebate (Ibra) will be granted for early settlements and no lock-in periods apply.
9. No interests are charged (but profit rates apply)
Borrowers, especially non-Muslims, are generally confused or misinformed about the differences between profit and interest rates. Islamic personal financing is said to charge no interests, yet, there is still a profit rate attached.
So what’s the difference? With conventional personal loans, an interest rate is levied on the principal amount borrowed; it is how banks make money on loans. But in Islam, money itself is said to have no value, it’s more a measure. Thus, simply charging interests to account for the time it takes to repay borrowed money is considered unfair (or unjustified). Islamic financing remedies this by charging a profit rate instead.
The profit rate functions more like business earnings. It is gained by buying an asset (with personal loans, the asset is cash) and selling it for a profit, to the borrower. Thus, Islamic personal financing doesn’t charge an interest. Instead, it charges a fee for buying an asset on behalf of the borrower and earns a profit as a result.
10. There are special charges
The ‘Wakalah’ or agency fee of RM30 to RM50 is often included in an Islamic personal loan but it does not necessarily increase the overall cost of financing.
This is because, other features of Islamic financing work to even out loan costs i.e. rebates for early settlements, no compounding of profits and late penalties that are capped.
So Which Type of Personal Loan Should I Choose?
When it comes down to it, you should opt for a loan with low rates, flexible repayments and favourable terms i.e. low or no early repayment penalties and processing fees.The good news is that you can enjoy attractive offers from both conventional and Islamic personal financing!
But an Islamic personal loan might appeal more to you if you are concerned about shariah compliance and prefer a loan that comes with benefits like no lock-in period, rebates for early settlements and a protected floating rate.
Top 3 Islamic Personal Financing
Here are three of the best Islamic personal financing options to consider:
1. Alliance CashVantage Personal Financing-i
If you can repay your loan within two years, then you might want to take advantage of the special promo rate of 4.99% per annum (for eligible applicants). This loan is also considered a quick-approval loan that gives you an answer within 24 hours, making it a good option if you are in need of fast cash! The borrowing amount ranges from RM5,000 to RM150,000 but to apply, your income must reach at least RM36,000 per year.
2. HSBC Amanah Personal Financing-i
This loan also promises quick processing and disbursement within 72 hours (after approval). Although the profit rate is a little bit higher, averaging 10.5% to 12.5% per annum, there is no stamp duty or processing fee charged.
The income requirement is RM36,000 per year but if you don’t have an existing relationship with the bank, the requirement is increased to RM60,000.
3. AEON iCash Personal Financing
This personal loan is apt for those with very low income as the minimum annual requirement is just RM9,600 and if you are an AEON card member, beneficial rates could apply. Moreover, if you need to borrow only a small amount, this loan might be a good option as the minimum financing amount is RM1,000.
Bear in mind though that this loan does come with a processing fee of 2% to 4% of the loan amount plus 6% GST (capped at RM400). Processing for this loan could take a little longer than the financing options above, estimated at approximately one to three days.