Personal Loans

Credit comes in many forms, and it’s a powerful tool that can help people build their lives and survive through emergencies. However, it can also be very damaging if you misuse it.

Guide

Summary

A personal loan is a way for you to borrow money from a bank or financial institution. Think of it as a more general type of loan where you won’t have to provide the bank with any form of collateral, like a house or a car. You have the freedom (and responsibility) to use the money you get from the loan to pay for whatever it is you need to pay for. 

• Primary cause of bankruptcies in Malaysia 
  Personal loans are the #1 cause of bankruptcies in Malaysia. If you don’t ABSOLUTELY need to get a personal loan, don’t get one! 
  
  If you’re getting a personal loan to help pay your other debts, go to Agensi Kaunseling & Pengurusan Kredit (AKPK) first and get some financial counselling. This is so you don’t make yourself worse off than before! 
   
• Always check the interest rate 
  Interest rates on personal loans are often lower than credit cards, but they can still be as high as 18% per year! If you absolutely need a personal loan, make sure you’re choosing the right one with the lowest interest rate. 
   
• Beware of personal loans from unlicensed money lenders 
  Newspaper reports tell us that going to unlicensed money lenders is dangerous and can get you into financial trouble. Make sure you know which lenders are licensed and which ones aren’t, and DO NOT go to an Ah Long! 
  
  (Bankruptcy is the legal status that indicates that a person is unable to pay off their debts to their creditor(s). You are declared bankrupt after you go through bankruptcy proceedings and a judge declares you bankrupt. Simply not paying off your debts does not make you bankrupt, instead it makes you insolvent. You need to owe at least RM50,000 to your creditors in order to be declared bankrupt.)

Infographic

DEEP, DEEP DIVE
 

Should you get a personal loan?

Before making any financial decisions, it’s always good to ask yourself a few crucial questions: 

What am I buying? Do I really need it (e.g. is it for a medical emergency?) or do I just want it (like having a fancy vacation)? 

A personal loan is NOT a way to give yourself access to something that you can’t afford. It should only be used for emergencies. Taking on debt by borrowing money opens you up to falling into a vicious cycle of debt. 

Am I getting this personal loan to fund an investment? 

You also shouldn’t use a personal loan to pay for investments. For example, don’t take a loan to buy shares or to buy cryptocurrencies. You are never guaranteed a return on investments, so taking out a loan to make an investment also means taking on high risk. 

Can I use my savings to pay for this item instead? Should I wait and purchase this item when I have some extra cash? 

If it’s something you really want, then save for it slowly rather than taking out a loan. Use our savings goals calculator so you can figure out how much you have to save every month until you can afford it. 

Am I getting this personal loan to sort out my outstanding debts? 

Some people take out personal loans to pay for their other debts, that way they are making only one payment at a hopefully lower interest rate. If this is you, you should first get financial counselling from AKPK to figure out if a personal loan is really the best way to manage your debts.

What are the differences between debt on a credit card vs debt from a personal loan?

Interest rates on credit card balances are often much higher. 

Credit card interest rates are often as high as 18%, compared to just 10% or less on a personal loan. 

The rate of repayments on personal loans are fixed. 

You’ll be paying monthly installments throughout the term of the loan. A credit card is much more flexible and lets you pay any amount you want, so long as you pay the minimum amount required. However, check out our content on credit cards to learn how just meeting the minimum payments on your credit cards results in you paying a lot of interest.

How do you choose a personal loan?

Personal loans ads will often say the key features of the loan they are offering include: 

• low interest rates and fees 
• low interest rates and fees 
• up to 7-year tenures and high financing. 

Low installments and longer tenures might seem like good reasons to take a personal loan but don’t be fooled. What you should be looking at is the total interest that needs to be paid over the lifetime of that loan. 

Interest rates 

Personal loan ads will say things like ‘attractive rates as low as 0.66% p.m., (‘p.m’ simply meaning ‘per month’, which is the rate that will be applied to your loan amount every month.) 

In order to convert this to an annual or per annum interest rate (p.a.), simply multiply this number by 12: 

0.66%×12=7.92% 

To find out the true rates, always, ALWAYS look at the product disclosure sheet. Here is an example and we’ve boxed in red what you should be looking at:

What does the product disclosure sheet tell you? 

• The interest rate is between 0.66% to 1.50% per month or 7.92% to 18% per annum. Guess what the 18% is very similar to what you’d be charged on a credit card! 
• The effective interest rate is significantly higher (this is the interest you are paying if you include the effect of compounding)

You’ll find that the longer the tenure of your loan, the less you pay per month for any given amount of financing. BUT the total interest you pay will be much higher. 

Suppose you borrow RM 10,000 at 0.66% interest per month for a loan term of 12 months. The total interest you’ll pay over the lifetime of the loan is RM 792. 

However, if you decide to borrow for 84 months (7 years) because the monthly instalments are much lower, you’ll find that the overall interest you pay is RM 5,600!

Years	1	3	5	7
Loan amount	RM10,000	RM10,000	RM10,000	RM10,000
Monthly repayment	RM900	RM344	RM233	RM186
Total repayment	RM10,800>	RM12,400	RM14,000	RM15,600

Use the calculator provided to see how much interest and payments you’ll be making if you take a personal loan.

Fees 

You might think the only cost you are paying for the loan is the interest cost. However, that’s not the case, you will also be incurring fees. In the snapshot below, we find that on top of the interest or profit rate they charge on the loan, they also charge you a one-time processing fee that can be as high as RM 400!

Make sure that you take the fees into account as well!

What should I do if my personal loan application gets rejected?

I really need the money, maybe I should go to an Ah Long? 

If your loan application gets rejected and you’re tempted to go to an Ah Long for a loan, BEWARE. 

When the Ah Long says “Sepuluh Tiga” and “Sepuluh Empat”, what they really mean is that they’ll be charging you 30% or 40% interest per month. And no, that’s not the interest for a year, that’s what they charge every month! So, let’s say you need RM 1,000, it’ll take you 12 months to pay it off, and the Ah Long offers it to you at 30% interest. 

Here is what you’ll be paying: 

The total cost to you: RM 3,761 
Interest cost: RM 2,761 (yup, you’re paying more than double just to borrow RM 1, 000!) 
Your monthly repayments: RM 313 

Can you afford RM 313 per month? 

Newspaper reports tell us that Ah Longs are willing to be violent and confiscate important documents from you to ensure that you pay off all your debts to them. And with Ah Longs, there’s no such thing as ‘paying off your debts early; they want to make sure they get all their money back, and with interest!

Practical Advice

Checklist of questions to ask your bank/money lender 

You should always know all the terms and conditions beforehand when applying for a loan. Here is a summary checklist of questions you should be asking your bank/money lender 

• What is the interest rate per year if I take a loan for X number of years? 
  
  If they give a small number like 1.5%, you should ask if that is per month or per year. Remember: 1.5% per month is actually 18% interest per year. So, if you were going to take this loan to pay off your credit card debt, that’s a really bad idea! 
  
  Legally, licensed money lenders can’t charge you interest above 12% per year if security is provided, and only up to 18% if it’s an unsecured loan (a loan where you don’t put something up as security or collateral) (Source: Money Lenders Act 1951, Part V, 17(a)) 
   
• What is the total interest cost for this loan? 
   
• How much will I be paying monthly? 
  
  Be sure you can meet these monthly payments. 
   
• What are the charges if I settle the loan early (also known as the prepayment penalty)? 
   
• How does the interest rate increase if I don’t meet my monthly payments? Are there any other penalties? 
  
  Our monthly spending can sometimes be unpredictable, and we may end up missing a monthly loan payment or two. Always ask if your interest rate increases and how much the penalty or late charges are. 
  
  If the bank/money lender doesn’t give you clear answers to these questions above or they insist that you submit an application first, you should consider this a red flag. They may not be a trustworthy moneylender and you may be walking into a financial trap. 

Check if you are going to a licensed moneylender 

It isn’t always obvious who a licensed money lender is and who isn’t. 

Some money lenders might pretend to be licensed when they are not – be careful! 

If you’re looking for a loan on the internet or end up on a WhatsApp chat with someone looking to give you a personal loan, you should be very, very careful! 

Like most Malaysians, you’ve probably heard or read horror stories about people who have fallen victim to loan sharks and their shady methods. This is why it’s crucial to always do your research about the moneylender before you decide to borrow money from them. Always read the fine print, and take as much time as you need before you sign any documents (don’t let anyone pressure you into it!). 

The example below shows you what looks like an authentic license from Bank Negara but is NOT:
 

Don’t take a risk. If you have any doubts or inquiries about the legitimacy of a moneylender, get in contact with Bank Negara. You can confirm with them that the moneylender you’re looking at indeed is registered and licensed:

BNMTELELINK (Customer Contact Centre) 
Tel: 1-300-88-5465 
Email: [email protected]
To submit enquiries or complaints, type 15888 
BNM TANYA