Recently I overheard a person who decides to borrow a personal loan from bank to invest on ASB ( Amanah Saham Bumiputera) trust fund. According to this person, the lowest interest rates for Bank Islam Personal Loan is around 3.25% p.a. while ASB investment provides a hefty 6% return. This person claims that he’s making 6% – 3.25% = 2.75% by leveraging on bank’s money. Is this the case ?
To really understand how personal loan interest works, we must dig deep into how personal loans interest is calculated in Malaysia. Typically, a bank or financial institutions imposes a Flat Interest Rates structure when calculating interest for car loans and personal loans. What Flat Rate is exactly ? This basically means that initial sum of money borrowed will always be used to calculate the interest rate for the entire tenure of the loan. I’m not gonna explain much as there are plenty of resources on how a Flat vs Effective interest rates works such as here. Although the advertised interest rates seems much lower, the EIR(Effective Interest Rates) of this loan could be nearly as double as compare to reducing balance interest rates.
As a rule of thumb, the conversion from flat interest rates is nearly double effective interest rates. The figure sits around 1.8. So this persons borrows at 3.25% p.a x1.8 = (EIR) which sits around 5.85 % p.a. Of course there comes the extra charges such as RM50 Wakalah fees and Stamp Duty which sits around 0.55% of the personal loan. Additionally you must purchase also additional products such as BancaTakaful and Will Writing from Bank Islam to enjoy the lowest interest rates. So how much does this person really earns from the leverage ?
The moral of the story is, always understand how Interest Rates works for certain type of loans before making decision based solely on the figure. Fortunately, most banks are required to display their EIR (Effective Interest Rates) besides from what you see in the brochures of the loan. Just dig deep into the product disclosure sheet where the EIR will be displayed.
Bank Rakyat is a major bank in Malaysia that provides one of the most popular personal loans in Malaysia. This bank has been around since the 50s in Malaysia providing Islamic compliant financial products to Malaysians.
Today, Bank Rakyat’s personal loans is one of the most popular personal product in the market.
The few major personal financing products from Bank Rakyat are Personal Financing-i Aslah Rakan Pintar, Personal Financing-i Aslah Public and Personal Financing-i Aslah Private.
Personal Financing-i Aslah Public
This Bank Rakyat Personal Loan product is meant for government servants in Malaysia. As repayment for Public sector personal loan is done via auto salary deduction. The risk of default is rather low for these type of loans. Therefore, financial institutions are able to give a lower and competitive interest rates for private sector loan.
Personal Financing-i Aslah Private
Bank Rakyat Personal Financing-i Aslah is meant for private sectors in Malaysia. The interest rates for this loan is competitive among the other private sector loans however it is higher than the loans catered for public sector.
Line of credit may be a new term in Australia but it has been a popular products in developed countries for a long time. So how does line of credit works.
Line of credit takes in many form of finance product and is rather different from the traditional personal loans. The most similar financing products as line of credit would be credit card, overdraft and on demand loans. Except that the credit is directly available as cash for line of credit.
Line of credit may be unsecured or secured. A secured line of credit may requires collateral or guarantor. The collateral or guarantor may be an existing investment or assets with the financial institution. An unsecured loan do not requires collateral however the interest may be much higher with more stringent approval process.
For a start, a borrower will have to apply for a line of credit account with a financial institution. Personal line of credit application criteria may be as stringent as unsecured personal loans. A good credit score and stable income will help. After the approval process, a borrower will have to start a line of credit account with the financial institutions.
To withdraw funds, a line of credit account usually comes with an ATM card or a chequebook. A person will only have withdraw from these options to start using his or hers line of credit. Typically there is a limit assigned to each line of credit account.
Line of credit interest rates is calculated on usage basis. Normally, interest will only be charge on what is used by a borrower. If a borrower repays all the line of credit debt, there will be no interest rates charged. However there are usually periodic cost of maintaining a line of credit account. Some banks may charge a monthly flat fee for keep line of credit account active.
Line of credit repayment may be rather flexible compared to traditional personal loans. A borrower can pay the amount that he or she can afford but there is usually a minimum payment needed. Obviously, late payment will incur extra charges and penalties.
Some banks do offer converting flexible payment to fixed amount of payment. This may however incur extra cost but let a debtor manage their cash flow.
Personal Loan is one of the more popular financing products in Malaysia. The number of personal loans borrowers has been growing for years despite curbs from “Bank Negara” the central Bank of Malaysia.
There are various types of personal loans in Malaysia. Majority of the personal loans have a flat interest rates with standard fixed repayment. There are some variable interest rates personal loans but the number is small. On a standard basis, personal loans in Malaysia are usually unsecured which requires no collateral and no guarantee person. Thus, banks are rather strict is personal loan approvals.
Repayment for personal loans is done on fixed basis. The range can vary anywhere from 1 year to a maximum of 10 years repayment period. A standard minimum would be 1 year however Bank Negara has recently capped the maximum of personal loans repayment to 10 years. Fixed repayment would be good for borrowers as they can plan out their budget with a known value of repayment.
Credit Card vs Personal Loans
Credit Card is undoubtedly the most popular form of loans available. As consumer swipes their card, they are unconsciously borrowing from financial institutions and will have to pay back the debt sooner or later. How does this differs from Personal loans ? There are various type of credit card users. A person who uses a credit card for convenience purpose and is able to control their spending habit will not find any issue with credit cards. However, there are people who leverage credit cards as means to solve troubled financial situations. This is bad as credit card has one of the highest interest in the country.
Credit card interest is calculated on reducing balance basis, which in terms mean that you only pay interest for what you owe. As for Malaysians personal loans, interest is calculated on Flat rate basis which means that the initial sum borrowed will used for the entire tenure of the loan.
A Credit Card would be good if a borrower have the means to repayment debts without hitting the maximum interest rates which sits around 18% p.a. If a person is not able to repay his or her credit card debts, it is recommended for the borrower to convert his or her credit card debt into a personal loan where the Effective Interest Rates will lower than the credit card’s maximum interest rates.
The borrower will also be able the lengthen their repayment which in turn means a lower monthly repayment with longer tenure. This can help improve a borrower’s financial situation dramatically while financial prudence is still required to manage the future situation.
CCRIS & CTOS
As a standard , CCRIS and CTOS credit score will be used when assessing any personal loan applications. It is utterly important for any borrowers to have a good credit rating on both credit score system. One standard basis, a persons credit score will be kept for 2 years. Data that are over 2 years will be rotated with newer records. Therefore, it will be better to have a clean record for 2 years before applying for personal loans. Any late payment for 2 consecutive months will raise a red alert.