Table of Content
What Is a Personal Loan?
Factors to Consider When Choosing Personal Loans
What to Know Before Getting a Personal Loan
When to Consider a Personal Loan in Malaysia?
How to Know if You’re Qualified?
Benefits and Advantages of a Personal Loan
Personal Loans: A Guide for Smart Personal Finance
A strong foundation in personal finance is the key to achieving your financial goals. While personal finance concepts are often overlooked in traditional schooling, they’re an essential skill we need to master when entering adulthood. This is especially true when it comes to managing your debt and making informed financial decisions. One tool that can be useful in certain situations is a personal loan. But how do you know if it’s the right choice?
This is where a personal finance guide is helpful as it equips you with the knowledge and tools to manage your money effectively, including understanding common financial products like personal loans. This article serves as a comprehensive guide to personal loans. We’ll explore what a personal loan is, delve into the different types available, and discuss when it might be the right option for you.
What Is a Personal Loan?
The straightforward definition of a personal loan is that it is an unsecured or non-collateral loan. Other loans, such as car loans, or housing loans, are earmarked for the purchase of that specific product, which means the house or car you are purchasing acts as the collateral for the loan, while there are no collaterals required for personal loans.
This means with a personal loan, the lender or bank takes a great risk in lending the money, whereas lesser risk is involved for the borrower. This is the reason why personal loans have higher interest rates in most countries, and Malaysia is no different.Now that you understand the definition of what a personal loan is, let’s move on to the next section detailing the types of personal loans available.
Factors to Consider When Choosing Personal Loans
Like any other financial product, there are a few types of personal loans to suit different needs. Here are a few key factors to consider when choosing a personal loan.
Interest Rates
There are two main types of interest rates associated with personal loans: fixed and variable. The former offers a consistent interest rate throughout the loan term — providing predictability for monthly payments and making it easier to budget. Conversely, variable interest rates fluctuate based on market conditions which can lead to lower interest rates at times but also carries the risk of rates increasing in the future.
Loan Terms
Personal loans come with short- or long-term repayment periods. For short-term personal loans, repayment periods range from a few months to a few years. They often come with higher interest rates but require less total interest paid if you can manage the higher monthly payments. Long-term loans span several years which translates to lower monthly payments but results in more total interest paid over the life of the loan
There are benefits to each type of loan in terms of personal finance, and choosing the right one will depend on your own circumstances and the purpose of the loan.
What to Know Before Getting a Personal Loan
There are a few things to consider before you decide to take on any banking product or solution. Primarily having to do with the impact it will have on your personal finances.
Active loans and credit card debt play a huge role in your personal loan prospects. If debts are too high, you won’t have the capital to pay your loan, making it difficult for you to qualify. So before you apply for a loan, do a rough credit check on your personal finances. Remember to include your non-credit card obligations and loans. Take into consideration your Netflix subscription, phone bills, utilities, food, fuel, and everything you need to spend money on. Go ahead and add your hair treatment in as well, it is part of your expenses. These are all expenses that you need to be able to cover outside of your debt.
When to Consider a Personal Loan in Malaysia?
There are several reasons why someone might want to consider getting a personal loan in Malaysia, as opposed to other financial tools.
One of the major caveats or advantages of a personal loan is that it is sometimes the cheaper option. Especially, in contrast to credit cards, interest rates alone, pose an attractive advantage. Personal loans are the way to go for business investments, maybe a downpayment for your house or as a quick fix to cover a hospital bill. Of course, this is only an option if you can’t afford to use cash out of pocket.
Maximum interest rates on credit cards in Malaysia are 18% per annum, and withdrawal fees for a cash advance can go up to 12%. If your funds are tied up in an FD or investment insurance plan then there is also a charge to make a withdrawal, not to mention the wasted investment opportunity if it has not matured.
It is in this scenario that considering a personal loan might be a better option.
How to Know if You’re Qualified?
The requirements or qualification criteria for personal loans in Malaysia vary from bank to bank. The general stakes include your age, occupation, income, capacity to repay the loan and place of residence.
You will need to have a stable source of income, salaried or self-employed. Your eligibility is dependent on your company, credit history and outstanding debts, i.e. credit card bills, housing loans, and car loans.
Here are some of the requirements to secure a personal loan:
- A stable source of income, salaried or self-employed.
- A healthy debt-to-income ratio and credit score.
Here are some of the documents required in your application:
- Income proof (payslip, EA form, or latest BE form)
- Current working contract
- Payment track record and sanction later (if you have existing loans)
What is the minimum salary for a personal loan?
Generally speaking, if you still have 70% or more of your monthly income after deductions (taxes, outstanding loans, etc) then your chances of securing a personal loan are a bit higher. To be specific, however, there are banks that actually offer low income personal loans. An individual that’s being paid the minimum wage are welcome to apply for personal loans, so long as they possess a stable source of income and a healthy credit report.
Benefits and Advantages of a Personal Loan
There are a few advantages to taking on a personal loan, we covered some of the basics when we talked about why you might want it as an option. Well here are a couple of other advantages that you might consider.
1. Processing is faster
If you’re new to banking, there is A LOT of paperwork involved. Unless you’re applying for a personal loan or credit card. Some banks even grant instant approval loans via their online platforms.
2. Helps with your credit portfolio
Personal loans expand your credit portfolio. Healthy credit is an indication of your responsibilities with money and how well you manage them. Therefore, with a personal loan, and some good habits, you get a better credit score, making it easier for you to qualify for other larger credit lines, like a home loan.
3. Use of loan
As you know, loan names correlate with their purpose, home loan to purchase a house, car loan to purchase a car, and so on. Personal loans are just that, personal. There is no one purpose for a personal loan, which means you are not limited by it.
Almost every bank in Malaysia offers personal loan products, there are several options available. In the same way, there is an equal amount of education available out there to help you make the right decision for yourself. If you happen to have a hard time choosing between business financing or a personal loan, we might have the answer! We hope you found this article helpful, and remember to check out Funding Societies for the business solutions you need.
Sources:
RinggitPlus, Credit Card Tiered Interest Rates Explained
Hong Leong Bank, Does Your Lifestyle Affect Your Chances of Approval?
Maybank, Personal Loans FAQ’s
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