What Is A Personal Loan: What are the different categories of personal loans?

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Personal loans are a type of loan issued by banks and financial institutions. This is the perfect solution when you need extra funds to fund personal expenses such as home renovations, vacations, education costs, business, medical bills or whatever. Personal loans give you the financial flexibility to use the funds according to your comfort and needs. 

As the name suggests, a personal loan is a type of unsecured loan and helps meet your current financial needs. You usually do not need a guarantee or security to apply for a personal loan.How does a Personal Loan Work?

Personal loans work in the same way as other bank loans. You apply for a certain amount of loan from a bank to pay for things you need or want. If your loan application is approved, you will receive the lump sum amount you applied for and then repay the bank in regular monthly installments. The monthly payment amount includes the principal amount plus fees and interest. Personal loans usually have a shorter repayment period than other types of loans, ranging from 6 months to 10 years.What are the different categories of personal loans in Malaysia?

1. Debt Consolidation Loan A debt consolidation loan is a type of loan that you take out to consolidate or consolidate more than one existing loan under your name.

2. Quick Approval Loan This loan can be withdrawn to your account as soon as 24 hours to 2-3 working days. Ideal if you desperately need financing and cash, or need to pay for an emergency.

3. Islamic Financing Loans Islamic personal loans are loans that follow the principles of Islamic banking. Islamic personal financing by Islamic banks in Malaysia adopts the concept of Bai ‘Al-‘Inah and is fully Shariah-compliant.

4. Business Loans For first-time business owners or starting a franchise, getting a personal loan can help you get the main money to start your business venture.

5. Home Loan You can use it to finance the down payment on your home or even to finance all the incidental costs that come with buying a home including stamp duty, processing fees, property taxes, maintenance fees and to pay the monthly installments of your mortgage.

6. Wedding Loan A personal loan for your wedding day expenses, which will cover all related costs such as decoration, venue, food catering, and more!

7. Car Loan You can use this to put money for down payments, to service your vehicle, and any vehicle-related expenses you have. Perfect for your next car or motorcycle.

8. Government Loan It is an unsecured financing option offered exclusively to civil servants or public sector employees. If you are currently working in the private sector and/or you are an employee of a multinational company, you are not eligible to apply for this loan. It usually has a lower market interest rate or profit rate.

9. Home Renovation Loan Is a loan to cover the expenses of renovation or maintenance of your home. It allows you to fund your home renovation project to turn your home into your dream home.Does a Personal Loan require collateral?

A personal loan is an unsecured loan like an money personal loan. This means that you do not have to offer collateral or assets (such as your house or car) to the bank while you are borrowing money. You also don’t have to put money down. The bank will review your financial backgrounds, such as your minimum wage and credit score, to determine whether to approve your personal loan application and at what interest rate. Because loans are not secured with assets or collateral, interest rates tend to be higher.Secured Loans Vs. Unsecured Loans: What’s the Difference?

Now let’s discuss further exactly is the difference between a secured loan and an unsecured loan.

Secured Loan

  • Loans linked to collateral – something as valuable as a car or a home.
  • The lender can take the collateral if you do not repay the loan as you have agreed.
  • Car loans and mortgages are the most common types of secured loans.

Unsecured Loan

  • The lender lends to the borrower to profit from the interest charged on the principal amount.
  • For real estate loans, the borrower pays interest from the outstanding principal amount
  • Interest rates can be fixed rates or based on floating rates.
  • Payment is made within the stipulated period in installments.
  • A portion of each installment paid is used for servicing
  • interest, while the rest goes to pay the principal.

Features of Personal Loans

A personal loan is a loan taken out by an individual to finance personal expenses. This includes financing a wedding, making renovations to a home, or even for a vacation. But it is important to note two general features of personal loans.

Unique features of personal loans

  1. The flexibility of end-use –  There are no restrictions on how you should spend the loan amount. This is in contrast to a home loan or auto loan where the loan amount can only be used to purchase the respective property or vehicle. Personal loans allow you to freely use money the way you want.
  2. Lack of collateral – As mentioned above, a personal loan is an ‘unsecured loan’, which means you are not required to provide collateral to the lender in the form of cash, shares, or other assets. This may make it more attractive for some customers who may not be able to raise the money needed as collateral.

Personal Loan Interest

What are the advantages of a personal loan?

The main advantages of a personal loan include the following: 

1. Fast enough,

2. There are no restrictions on how you can spend the money.

3. Does not require collateral.

So, if you don’t have assets like a house, stocks, or gold to offer as collateral, and need money right away, this is probably the most appropriate option. One of the best advantages for loan applicants to choose personal loans from other types in Malaysia is the approval period. Unlike other loans such as housing loans, car loans, etc., banks can approve personal loan applications within 24 hours or the day itself. Moreover, the nature of the personal loan is not tied to the restriction of what the loan applicant can spend. Thus, applicants can spend the money on home renovations, debt consolidation, car repair bills, and more.

Factors considered by the bank when you apply for a personal loan

There are many factors that will affect your eligibility for a personal loan. Generally, if all other things are equal, the younger you are, the higher the chances of your loan being approved. Here are some key factors:

  1. Age –  To be eligible to get a personal loan in Malaysia, you need to be over 21 years old, but not older than 60. For some loans, the conditions are stricter, requiring people to be under 55 or 50 years old.
  2. Income –  To qualify for a personal loan, you need a level of income that ensures the bank you can afford to qualify for the loan. Most personal loans in Malaysia require you to have an income of at least RM 1,000, although RM 2,000 – to RM 3,000 is more common. Of course, the higher your income, the better. If you have a very high income, you may be eligible to choose some low-interest personal loans, only available to those on high incomes.
  3. Residential Status –  To be eligible for a personal loan, you must be a Malaysian citizen or have Permanent Resident (PR) status.
  4. Credit Score –  Before your loan application is approved, a thorough credit check is done to ensure that you are able to repay your loan. Bad credit history can lead to a rise in interest rates or rejection of a loan. You should always maintain a good credit history.
  5. Debt Service Ratio – If you’ve ever applied for a car, home, or personal loan, you’ve probably heard the phrase ‘debt service ratio’ (DSR) from a bank loan officer as they explain to you how the loan works. The debt service ratio is one of the key factors that banks will assess while doing due diligence during the loan approval process. The DSR is calculated based on the sum of all your monthly debt obligations – often referred to as recurring debt/commitment, which includes the amount of your loan for a mortgage, car loan, personal loan, your minimum monthly payment for any credit card debt, your other loans, along with commitments monthly for current applications,
  6. Employment status –  Depending on your employment status, you may not qualify or have additional requirements to apply for a personal loan. For example, new graduates need to have a payslip of at least 6 months to qualify for a personal loan, otherwise, some banks require a guarantor.

Fees and Charges for Personal Loans

Apart from the interest rate itself, there are a number of other fees and charges associated with applying for a personal loan. Often, people fail to take these allegations into account. Some of the personal loan fees and charges are processing fees, stamp fees, early payments, and late payment charges. Because the Malaysian market is highly competitive, some lenders waive certain charges entirely, such as annual fees.

By aamritri

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