Most of you probably know what a loan is.
However, there are many types of loan that you can choose and before you go to any banks or any financial institution, it is best to know what type of loan suits your need.
If you are thinking of going on a vacation with your loved ones but short of fund, you probably need to apply for a personal loan.
There are many banks and other financial institutions that offer this kind of services.
However, before we get into that, let’s ask that question again:
What Is a Personal Loan?
Where can you apply for it?
What Is A Personal Loan?
In simple English, we can say that a personal loan is money you borrow from a lender for your own private use. Yes, personal loan is for private use and it can be for anything that you want. In many cases, you don’t even have to explain to your lender what you are going to do with the money.
You can use the loan for a variety of needs including a vacation, home repairs or remodeling, vehicle repairs, medical expenses, legal bills, education and even debt consolidation.
Anything that suit your need!
Just apply for it and hope that your personal loan will be approved.
A personal loan can also be defined as a short-term loan and it may be the answer to your short-term cash needs. This is because a personal loan normally has a repayment period that is shorter than other types of loan such as housing loan or a mortgage.
Whereas mortgage requires a time-span of 25, 35 or even 40 years, a personal loan usually goes for about one to five years in repayment period. The period may be longer these days as bank are more prepared to give bigger amount of personal loan to their clients.
For example, KUWAIT FINANCE HOUSE (KFH)’s Personal Finance-I loan is for an amount up to RM200,000 with repayment period up to 20 years.
See screenshot below:
Where Can You Apply For A Personal Loan?
Well, there are many places that you can go to apply for personal loan. The people or institutions that give you the loan is called the lender. They can be a bank, investment broker, or private lending company (money lender).
It is not advisable to borrow from unlicensed money lender though (better known as ‘Ah Long’) as not only is the interest fee high but your life can be in jeopardy if you fail to settle the loan on time.
In practice, many people will go to the banks or the lender’s office to apply for a loan.
However, with the advancement of technology, application can now be made via internet at the comfort of your home.
You still however need to go to their office for certain verification whenever necessary.
How Much Personal Loan Can You Apply For?
This quite a subjective question actually. How much you can get depend very much on your financial standing, your overall credit rating and where you apply for your personal loan. Banks normally will offer you higher amount of loan but you are subject to their strict requirements.
A thorough check via CTOS Sdn Bhd (Click
HERE for self-check) and CCRIS (Central Credit Reference Information System) sometimes are made by the banks to ensure that their interests are fully protected and to be fully satisfied that you are capable of paying back the loan.
They don’t want to suffer losses, do they? 😀
They might also impose certain requirements before approving the loan.
See example below:
Personal Loan And Line Of Credit
A personal loan can sometimes be confused with a line of credit. The key difference between the two is that a personal loan is a lump sum amount of money issued to you by the lender. With a personal loan, you will have to pay an interest rate on your principal (the initial amount you borrow).
The interest is paid over a period of time.
This is based on the agreement between you and the lender.
This interest rate can either be fixed or variable.
A line of credit is similar, but you have access to funds up to your credit line that you can access all at once or just what you need, when you need it.
In other words, a line of credit is a type of loan that does not come with a fixed amount. Line of credit can be seen, for example, in current account when you issue a cheque by borrowing via the line of credit given to you by the bank.
The lenders do not know when you are actually borrowing the money.
Most of them would charge you based on the interest rate at the time of your borrowings i.e when you issue the cheque with an amount bigger than what you have in the account but within your line of credit.
Secured And Unsecured Personal Loan
In general personal loans can be either secured or unsecured.
What is secured loan?
Secured loans mean you will offer the lender some type of collateral that they can claim in the event you don’t repay the loan. This can be land, vehicle, gold or other asset you own.
On the other hand, unsecured personal loans mean there is no collateral. The interest rates for unsecured loans are higher because there is a greater risk of non-payment.
In Malaysia a personal loan is usually unsecured.
Not long ago, banks and other financial institutions in Malaysia will ask for collateral or guarantor for personal loans. This requirement seems to be relaxed these days. Many banks are more willing to give personal loans without any collateral or guarantor.
It is important to note however, although you’re not providing any security, you’re still obligated to make your regular repayment on time.
Missing a payment may attract penalties and fees, and even negatively impact your credit score. The banks or your lenders may even take legal action against you.
This includes applying for summons and filing for bankruptcy whenever possible.
Terms Of Personal Loan
It is imperative for lenders and borrowers to seal the loan contract by signing an agreement that outlines the terms and conditions. Included in the agreement are the amount borrowed, the interest rate and the total amount you need to repay each month.
The agreement will also specify in detail your loan repayment terms – your monthly payment along with the period of the loan, in years and months.
As a rule of thumb, the longer the repayment period, the higher the total amount repayable will be.
As been stated earlier, personal loans are a short term loan. Therefore the period of a personal loan is generally one to five years, except in certain cases like KUWAIT FINANCE HOUSE (KFH)’s Personal Finance-I loan mentioned above.
This blog would like to remind you that it is important that you understand the loan terms prior to accepting the funds.
One of the things that you should keep in mind is while a longer loan term will result in lower payments, you will end up paying more for the loan over the life of it due to the amount of interest.
Hence, it is recommended that you only borrow the amount you need for your specific purpose and pay it back as quickly as you can.
Make sure the set monthly payment is something within your reach on a regular basis so you are not likely to default on the loan.
Common Use Of Personal Loan
Since the borrowers are free to do whatever he wishes to do with the loan money, then there’s no way for us to predict what is in the borrowers’ mind when applying for the loan.
They might want to do house renovation, going on vacation or even use the loan for wedding expenses.
Nonetheless, the most common use of a personal loan these days is probably to consolidate other debts such as credit cards and hire-purchase.
This is a great way to have one monthly payment and reduce your monthly expenses. It is quite a strategic way to handle your personal finance and reduce the headaches of handling too many accounts.
It is without a shadow of doubt that personal loans are a great way to access the money you need quickly. The application process is fast and simple. You can even do it online. You will generally need to verify employment, income and residence.
The lender will pull a credit check. You could still qualify for a personal loan if you have bad credit or no established credit especially if you are a government servant or you are applying loan from a financial institution other than banks such licensed money lenders.
However, you must be prepared to pay a higher interest rate and in some cases, you might need to have some type of collateral to offer.
As this blog stated earlier, the most common use of a personal loan these days is probably to consolidate other debts which is a good way to handle your personal finance.
Word of caution, however, this scenario only works if you are willing to set a budget and live within the boundaries of it. Too often, a person who gets a personal loan to consolidate their debt quickly racks up huge debts again.
Then they not only have that debt to pay, but also have another personal loan payment to meet each month as well. When this thing happen, it is advisable for you to enrol in a debt management course, especially if you feel you may be at risk to continue the cycle of accumulating more debt.
Do visit Bank Negara’s Credit Counselling and Debt Management (CCDM) Agency that was established in 2006 to undertake credit counseling and loan restructuring for individuals. This institutional arrangement aims to assist consumers who are encountering difficulties in meeting their financial commitments.