Personal loans are a very popular type of loan among Malaysians because personal loans are very easy to obtain. You don’t have to provide collateral or find a loan guarantor to get cash. You just need to have a good credit score and proof of regular income that shows you are able to settle the loan.
Aside from personal loans, Buy Now Pay Later is also the latest trend for short-term financing. These BNPL payments make it easier for consumers to make installment payments with a 0%interest rate, and the approval process is easier than personal loans.
However, for those of you who still do not know the meaning of a personal loan and need a complete guide to make it easier for you to understand what a personal loan is, things to consider before applying, things you need to know before signing a contract and more. We also list the mistakes to avoid when applying for a personal loan at the end of this article.
Meaning of Personal Loan
A personal loan is a money that you ‘borrow’ from a financial institution with an agreed interest rate or ‘interest’ that you pay over a certain period of time.
Personal loans give you the financial flexibility to use the funds according to your needs and requirements. Those who apply for a personal loan use the loan money for many things such as, for emergency matters, settling debts, wedding budget, buying a car or motorbike, education fees, settling debts, and so on.
Types of Personal Loans
There are two types of personal financing, namely “secured personal loans” and “unsecured personal loans”. What is the difference between these two types of “personal loans”?
Secured personal loan
Types of loans that require a guarantor or collateral. The collateral in question is a form of real estate. If the borrower fails to settle the debt, the bank can seize the collateral or transfer the responsibility to the guarantor.
Secured personal loans are often used by individuals with poor credit records. However, this type of loan is also in demand due to the lower interest rate compared to other loans.
Unsecured personal loans
This type of loan does not require a guarantor or any collateral. This type of loan is also faster and easier to be approved by the bank if the applicant meets the minimum requirements set.
But this type of loan has a higher interest rate than other bank loans.
5 Things To Consider Before Applying For A Personal Loan
Do you really ‘need’ to borrow?
You need to have a reasonable reason to apply for a personal loan, whether to renovate a house, buy a car, start or grow a business, education, medicine or marriage, and so on.
Before deciding to borrow, think about if you can raise funds by saving money. With savings, the loan amount can also be reduced. Personal loans can be used to cover shortfalls and cover the expenses you need.
You also need to consider whether the personal loan you want to take out is good debt or bad debt. Will the loan provide long-term returns or income for you? Taking out a personal loan is a commitment that you will be responsible for, this is to ensure that the loan has interest and will help you in the long run.
Unforeseen expenses can be a factor that leads to the need to apply for a personal loan. You may have no choice but to take out a personal loan to cover medical costs, surgery and other unforeseen emergencies. A personal loan can be a financial supply that you can count on when you really need it. Importantly your monthly income can afford to pay monthly installments.
Will your financial position improve?
Many are already trapped in debt traps. Money constraints or mounting debt are difficult things to overcome. A handful of individuals will take action to improve their financial position. While the general view of personal loans will add to the financial burden, but a good personal loan can actually improve cash flow and financial position.
Credit cards are a major source of debt. This so-called ‘plastic’ gives the impression of purchasing power but actually leads consumers to a chaotic financial position. You will face financial problems when having to pay off high credit card debt (usually at a rate of 18% per annum). To solve the problem, credit card debt can be resolved using a personal loan that has a lower interest rate.
You can also use the same technique for other debts, especially large debts by consolidating all the debts in one loan, where you can earn savings in interest rates.
Determine your cash needs and ability
Once you have obtained a reason to borrow, then you need to check the eligibility of the personal loan to avoid a loan that exceeds the required amount. It is important to evaluate the number of monthly repayments you can afford based on your income stream.
As a general guide, your monthly commitment should not exceed 60% of your monthly income. This is important as it helps you adjust the loan amount according to your ability. This will also determine the period for you to settle the loan.
In addition, maintaining 40% of the monthly loan will give you sufficient income for basic needs and other common expenses. Wise borrowers will not borrow beyond their means or take out personal loans that will be detrimental to their financial position.
Find the right lender
You need to know how to make a bank loan that is safe and worthwhile. Find a lender who can help achieve your goals and offer more than just processing facilities. Compare interest rates and payment terms with several lenders. This is to ensure that you are at a comfortable level and do not make mistakes. Discuss payment options with each lender carefully, especially if interest is fixed or variable and the flexibility to make early payments without high fines.
Deal with trusted lenders and loan consultants/agents
Trusted lenders will not take advantage of borrowers who trust them. All legitimate lenders will not ask for an advance payment, any fees will be deducted from the loan when the loan is approved and the fees will be clearly stated.
The same goes for legitimate agents, where they will not ask for any down payment. Their income will be provided by the lender once the loan has been approved. Be wary if an agent asks for a processing fee because that is one of the signs of personal loan fraud.
