The bare bones of personal loans

For many people, personal loans are the go-to means of securing emergency money. With rising costs of living; having a sufficient emergency buffer may not always be possible. If you’ve found yourself in that situation, these are some of the considerations you’ll need to take into account.

Is this the only solution?

Taking out a personal loan is taxing in terms of cost. Although, it’s a quick way to obtain a large sum of money, you pay for this convenience through high interest rates and various fees and charges. Have you considered all other forms of obtaining the money? If the event is not an absolute emergency, consider saving the money over time.

However, if you’ve truly found no other way; then it’s on to the mechanics of a personal loan and how you can make the most of it.

Choosing the right bank

Although, for the most part, personal loans are by and large the same kind of creature in every bank – what varies will be the rate of interest and the requirements for securing a loan. Some banks offer special rates for civil servants and government-linked companies (GLCs) and some loan products are exclusively for this group. There are then special loan products for those with an existing fixed deposit or unit trust with the bank. If you do, the bank will offer you a lower interest rate or a special loan designed to match up to 100% of the value of your fixed deposit or investment.

As for requirements, some banks prefer to offer loans only to customers who already have a particular standing with the bank; such as a credit card or banking account. Though, if a savings or current account is required; the bank will allow you to apply for one prior to processing your loan.

Always check the requirements and details of the loan with the bank before proceeding.
How much will the loan cost you in interest?

Personal loans are unsecured and thus the risk for the bank lending to you is greater; unlike the loan for a house or car. As such, the interest rates will be higher. Personal loan interest rates range from 6.2% to 13% depending on the bank and the type of loan product offered. Rates from 6.2% - 7.5% typically reflect those backed by securities such as an FD or investment, however there are a select few loans offering 6.5% unsecured if you have good credit standing. For the most part, the advertised interest rate for a loan will depend on your credit rating and income too. Civil servants can apply for loans at rates as low as 4%.

The 3 factors that determine how low a rate you get are:
1. Where you work (civil servant, GLC or private);
2. Your income and credit rating;
3. How much you are applying for. Larger loans receive lower interest rates unless you are a high risk customer.

If you are not a civil servant and do not have an investment account with the bank, the usual rate applicable will be in the region of 8-10%. Taking a 9% loan of RM10,000 as an example; be ready to pay RM1800 in interest alone for a 2 year loan; RM3600 for 4 years and RM5400 for 6 years. Repayment amounts each month will be lower the longer the tenure because payments are spread out over a longer period. You will be required to pay RM492 per month for 2 years; RM283 for 4 years and RM214 for 6 years. As such, you will need to factor in affordability (can you repay the required amount every month?) but also consider how much interest you are paying in the long run.

Because interest is calculated on the amount taken and not the balance remaining each year: your interest payments remain unchanged despite repaying a significant amount each year. As such, the more time you take to repay: the more interest you will pay. This can work out to a hefty amount. Take a look at the graphic below for a comparison between how the monthly repayment reduces and how much your total interest payments will increase.

How much can you repay?
Considering how much interest would be accrued the longer the loan tenure; it’s always best to resist the urge to stretch the loan as long as possible. That said, you will still need to juggle this along with other monthly commitments so as not to overstretch yourself and default on payments.

Are there other fees?

For many, they are sometimes unaware of the fees and charges levied on the loan. As such, when the payment is entered into their accounts; they find they are left with a lot less than planned. Fee structure is actually similar throughout most banks and these are: stamp duty, processing fees, insurance fees, late payment fees and early settlement fees. The first three are initial fees and will come out of the loan amount disbursed to you where else the last two are conditional – late payment fees are incurred when you are late in your monthly payments and early settlement fees will apply at select banks if you settle your loan ahead of the contracted period.

Applying for a personal loan can turn out to be a very expensive endeavour. Be sure to ask your bank what fees you will be charged; how and why so you can avoid paying more than the already high interest.

This was brought you by Diana Chai from RinggitPlus.com. RinggitPlus compares credit cards, debit cards, balance transfers and personal loans to help Malaysians get more for their money.