A personal loan is a personal financing tool serviced via monthly repayments over a pre-agreed loan tenure. Personal loans have two primary advantages in personal planning.

First, unlike car and home loans, you can spend the borrowed money from a personal loan on preferred expenses. Second, personal loans facilitate loan consolidation, earning you a lower interest rate and monthly repayment. For example, while credit card loans include interest rates as high as 18% p.a., taking a consolidated personal loan can help lower your credit card interest rate.

So, are personal loans unsecured or secured, and what are the eligibility criteria for such personal financing? Do conventional and Islamic personal financing offer similar loan terms, and which other factors should you consider when comparing loans?

If you seek answers to these questions and other considerations when you apply for a loan, this comprehensive guide is for you. Keep reading to learn more about finding the best personal loans Malaysia has to offer, including interest rates and the highest loan amount based on your monthly gross income.

Understanding Personal Loans

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What Is A Personal Loan?

As earlier stated, personal loans are a personal financing line of credit borrowed from financial institutions, including banks, online lenders, and the credit community (Licensed Money Lender). The loan amount is payable to the lender in monthly instalments as the sum of the principal loan amount and interest payment determined by the prevailing interest rates or profit rate.

The lending institution from which you borrow money issues the loan amount for approved personal loans as a lump sum deposited to your current or savings account. However, most lending institutions deduct a loan processing fee and stamp duty fees of 0.5% of the total approved facility from the principal amount before depositing.

Personal loans are among the most straightforward lines of credit to access in Malaysia, alongside credit cards, because of the following reasons-

• Some lenders, primarily non-banks, can process and approve a personal loan application (including depositing the loan amount) within the hour.
• They have a reasonable loan period or loan tenure, ranging from a year to ten years, allowing you to make comfortable loan repayments without overstretching your monthly income. However, the loan period varies, depending on the lender and the loan amount. Most lenders have an online personal loan calculator that you can use to calculate the personal loan amount and monthly payment tenure, including interest payments based on your monthly gross income.
• You can pay the loan’s outstanding balance in a lump sum and finish serving your loan before the period listed in the loan terms or loan agreement. However, most banks charge an early settlement fee of 2%-3% of the outstanding payment at the time of the early settlement.
• Unlike a home or car loan application, a personal loan has no predetermined purpose stipulated in the loan agreement. Therefore, you can use it for any activity, including emergencies, funds for business loans, and even debt consolidation for multiple loans.

However, while personal loans are easy to secure, your loan application must meet the lender’s eligibility criteria before a loan officer can approve it. While the loan criteria when borrowing money varies, most lenders check the applicant’s credit score, credit history, and debt service ratio.

Individuals with a poor credit score or credit history for loan or credit card monthly repayments may fail to receive the personal loan. Alternatively, the institution lending money may offer individuals with a poor payment track record personal financing at a higher loan interest rate for a conventional loan or a profit rate for Islamic personal financing.

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Types Of Personal Loans In Malaysia

Lenders classify personal loans as either secured on unsecured. A secured loan requires the borrower to submit an asset like an investment account, vehicle, machinery, cash account, or property.

Alternatively, the lender may request the loan applicant to include a guarantor in their loan application; loan guarantors take liability should the applicant default from their monthly instalments. Therefore, secured loans have a security asset that can offer the lender reprieve in case of defaults.

On the other hand, An unsecured loan is issued without the lender requesting a security asset or guarantor. Most lending institutions in Malaysia offer Unsecured personal loans. However, while unsecured loans are more accessible to Malaysians with a limited gross monthly income and assets, their interest rates tend to be higher than those on secured loans.

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Factors Affecting Personal Loan Rates

While most applicants can access an unsecured loan from Malaysian lenders, the lenders offer the loans at varying rates. Below are factors lenders consider when you borrow money before providing an unsecured loan at a specified interest rate.

1. Credit History/ Repayment History

Credit history refers to the documented data on previous loan facilities, including credit cards, and whether they adhered to the monthly payments. Lenders examine a lender’s credit history to assess their creditworthiness and assign interest rates accordingly.

A loan’s interest rate or profit rate’s primary purpose is cushioning the lender against losses due to defaulting. Therefore, a poor credit score earns you high interest, especially on an unsecured loan when you borrow money.

Besides defaulting on your monthly repayment or making late payments, a lack of credit history can cause banks to assign a high personal loan interest rate. You can access your credit history from certified Malaysian credit bureaus like the Central Credit Reference Information System (CCRIS).

2. Credit Score

Credit scores and credit history go hand-in-hand as both appear on your credit report. However, while your credit history offers details on your monthly payment for previous loan facilities, a credit score provides a glance.

A credit score is a three-figure digit assigned based on your credit history. A low figure represents a poor credit score, and vice versa. You can use this score table to establish what each credit score range says about your creditworthiness and how it affects your loan approval chances.

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3. Monthly Income

Based on the principle of risk avoidance, banks consider low-income earners a default risk, especially for unsecured loans. Therefore, a low gross monthly income likely translates to a high-interest rate charge. On the other hand, high-income earners receive lower interest rates per month due to their negligent low-risk status.

4. Debt Servicing Ratio/ Debt-to-income Ratio

Besides examining your gross monthly income, banks determine whether you can meet the monthly repayment requirement. As stated earlier, banks offer unsecured loans to be repaid as a fixed monthly instalment that covers the loan amount and interest rate or profit rate.

However, a potential borrower may be servicing other credit facilities, including home or car loans. A high amount of debt, even on a high income, presents you as a risk to the lender.

Therefore, lenders examine the debt-to-income (DTI) ratio before deciding on the interest or profit rates to charge a personal loan. To calculate a borrower’s DTI, banks divide the total of the former’s monthly debt obligation by the net monthly income, then multiply by 100% to achieve a percentage figure.

As a rule of thumb, your DTI or DSR should not exceed 60% of your net income. A figure above 60% indicates an increased risk of defaulting, causing lenders to charge a higher interest rate.

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Interest Rates On Personal Loans

The interest rate on personal loans is the borrowing charge that a borrower pays a creditor or institution for lending money. It is a percentage of the principal amount.

Lenders use various methods to calculate the interest rate on a personal loan, including the reduced balanced method and the flat interest rate method. However, Malaysian lenders primarily issue interest rates on personal loans as flat interest rates.

So, how do you calculate the flat interest rate on a personal loan? The standard formula for calculating a personal loan interest rate payable per instalment is:

 Principal Loan Amount x Loan Tenure (loan repayment period) x The Interest Rate Per Annum (Profit rate) / The total number of loan instalments

The primary disadvantage of a flat interest rate is that the monthly interest payments remain the same even as the outstanding balance on the principal amount decreases. Therefore, a flat interest rate is expensive, particularly for long-tenure loans.

While Bank Negara Malaysia sets the interest rate for banks, the individual lending institutions also consider the loan amount, credit score, and loan tenure while calculating the interest rate when you apply for a personal loan.

Comparing Personal Loan Rates

As stated above,  a Malaysian bank and any other lending institution, including a credit union, set its interest rates, provided the rates remain within the range recommended by Bank Niagara Malaysia. However, while interest rates are crucial in determining the actual cost of a loan, they are only one part of an equation.

Settling on the first loan offer based primarily on the interest rate can cause you to miss out on benefits included in the loan terms. Therefore always shop around and compare personal loans before taking the bold step to apply for a personal loan at a given lending institution. Besides interest rates, below are other factors to consider when shopping for a personal loan.

• Loan processing fees
• Profit rates
• Late payment penalties
• Early settlement fee
• Loan security (most Malaysian lenders offer unsecured loans)
• Debt consolidation loan facility

Also, the interest rate and loan tenure determine the fixed monthly installment on a personal loan. Monthly payments matter because a bank or credit union cannot award you a personal loan amount with monthly payments exceeding or constituting a large chunk of your gross monthly income.

Given the above factors, comparing personal loans is prudent before applying for one. You can start by viewing the table below to identify the best personal loan rates based on the interest rate/ profit rate and loan tenure.

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Table to identify the best loan rates based on the interest rate/ profit rate and loan tenure. 

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Best Banks For Personal Loans In Malaysia Based On Interest Rates

Below is an overview of Malaysian banks with the best personal loan rates and other favourable loan terms.

1. HSBC Amanah

HSBC Amanah Bank offers some of the most competitive profit rates on the market. The bank’s profit rates on personal loans range from 4.88% pa to 10.5% pa. Moreover, existing HSBC Amanah customers get charged a lower profit rate on their loans.

The bank’s borrower-friendly loans translate to an equally low monthly payment amount, ranging from RM109 to RM 163, depending on the profit rate charged. Its personal financing loan amount ranges from RM6000 to RM250000 and is eligible for Malaysian citizens and permanent residents earning a monthly income of at least RM3000.

2. Alliance Bank

Alliance Bank offers conventional and Islamic financing personal loan facilities at affordable rates. The bank has varying flat interest rates for loan tenures of up to seven years.

Borrowers can receive a loan of RM5000 to RM200000 from interest or profit rates as low as 4.99% pa for a one-year tenure. A two-year loan tenure includes a 5.99% pa interest rate or profit rate, while a 3-4 year tenure personal loan interest rate or profit rate is 8.70%. Loan tenures of 5-7 years include an interest rate of up to 15%.

Applying for an Alliance Bank personal loan online only takes ten minutes. The bank disburses the loan amount for approved personal loans within 24 hours.

3. AmBank

Being an Islamic personal financing institution, AmBank offers attractive profit rates on its personal loan facilities. The bank provides a profit rate as low as 3.35% pa for salary deductions under Biro Perkhidmatan ANGKASA.

Additionally, the bank offers an 8.50% pa flat rate to employees from select government bodies and private sector companies. You can click here to establish whether your employer qualifies you for personal financing by AmBank.

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Applying For A Personal Loan

The eligibility criteria for personal loans differ from lender to lender. Nonetheless, below are the basic requirements a bank, credit union, or online lender sets for loan applicants during the personal loan application process.

1. Personal Loan Application Documents

Lenders typically require that potential borrowers have the following documents when they apply for a personal loan.

• A completed bank-issued loan application form.
• A National Registration Identification Card (NRIC) or the Mykad for identification and age verification.
• An EPF (Employee Provident Fund) statement. Besides proof of contribution to the pension fund, some banks may use a borrower’s EPF funds as collateral for an unsecured loan.
• A salary slip to prove a regular gross monthly income; some banks may request that the personal loan applicant attaches at least three most recent pay slips.

While the documents above cut across the board for most lenders, the documentation requirements may vary depending on your income-generating activity (salaries/self-employed) and your employer (government/ private sector).

2. The Loan Approval Process For Personal Loans

With most Malaysian commercial banks and other lenders offering online loan application services, potential borrowers can apply for a personal loan in under thirty minutes. The approval process for personal loan applications is fast, as most lenders process, approve, and disburse funds to the borrower’s bank account within 48 hours. However, besides an online application on a bank or lender’s website, you can submit a walk-in application; the processing duration is the same.

However, loan officers conduct the following activities as part of their loan approval process.

• Document verification to ensure the documents included in the application form are in order.
• They will use your payslips, bank statements, and other relevant documentation to ensure financial health or eligibility to apply for the loan based on income.
• Lenders must run a credit check to establish your credit score and credit history. Essentially they legally access borrower credit information from credit bureaus like the CCRIS and other private bureaus regulated by the Registrar of Credit Reporting Agencies.
• Banks allow you to borrow up to three or four times your monthly income. They also decide the interest or profit rates charge on your loan during processing.
• Lastly, your credit score, credit period, DTI ratios, and loan period determine the loan amount you qualify for and the interest rate charged against the principal amount.

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How Does A Personal Loan Affect Your Credit Score?

A personal loan will affect your credit score in various ways. First, any loan application triggers a hard inquiry. A hard inquiry is when a lender pulls your credit information from a credit bureau to establish your creditworthiness.

While necessary, a hard credit inquiry’s immediate effect is lowering your credit score, and it remains on your credit report for up to two years. Therefore, limit the number of personal loan applications you make to limit hard inquiries.

Second, making late payments and falling behind on your monthly repayment will lower your credit score. A low credit score will limit your credit options and chances of getting a low-interest rate.

However, timely monthly payments will increase your credit score over the loan tenure. Therefore, while taking a personal loan will lower your credit in the present, it may raise it in the future, depending on how you handle the monthly repayment.

Common Mistakes to Avoid When Applying for a Personal Loan

A personal loan application is a straightforward process, taking up little time. However, each step taken during the process has consequences, and limited knowledge of such consequences can affect future credit prospects. Therefore, below are common mistakes borrowers can avoid before applying for a personal loan to improve their creditworthiness.

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1. Check Your Credit Score Before Submitting Application

A poor credit score limits your chances of getting a personal loan at favourable interest or profit rates. Moreover, some institutions may fail to lend you any money altogether.

However, checking your credit report before applying for a loan can help you identify areas that affect your financial health and take steps to improve your credit score. According to one Malaysian credit bureau, improving your credit score takes approximately six months of consistent good behaviour. Such behaviour includes paying old debts, taking credit facilities you can avoid, and being consistent with the monthly instalment.

2. Verify Your Debt Service Ratio (DSR)

Banks and other lenders limit their DSR calculations to debt against monthly income. However, this formula does not account for basic monthly expenditures, including food and utilities.

Therefore, calculate your DSR and ensure you will be comfortable making monthly payments on the loan amount plus interest rate once the bank approves your loan. Such information prevents you from defaulting and tainting your credit score.

3. Eligibility

Ensure you meet the lender’s eligibility criterion before applying for the personal loan to avoid unnecessary hard queries on your credit report. Eligibility factors include age, income, employment type, employer, and citizenship status.

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Managing Your Personal Loan

Prudent personal loan management is crucial in ensuring adherence to loan repayments. Below are tips to guide you on effective personal loan management.

1. Restructure Your Monthly Budget

As stated earlier, banks always consider the debt-service ratio before approving loan applications. The DSR evaluates your capacity to repay a loan based on your income commitments.

Malaysian banks have varying allowable DRS limits. However, as a rule of thumb, lenders may offer a lower amount or reject a loan application with a DSR exceeding 70%.

DSR calculations consider only the debts listed in your CCRIS (Central Credit Reference Information System) report as your monthly commitments. For example, if you earn RM4000 monthly and are serving an RM400 car loan, an RM200 credit card loan, and a RM 1000 house loan, your DSR is:

(RM400+RM200+RM1000)÷RM4000x100% = 40% (which is okay)

However, if you had similar monthly commitments on an RM2000 monthly salary, your DSR would be:

(RM400+RM200+RM1000)÷RM2000x100% = 80% (which is bad)

Therefore, consider restructuring your budget through techniques like loan consolidation to enjoy lower monthly commitments on the consolidated loan and improve your chances of achieving a lower DSR on future personal loan applications. Also, DSR does not include consider utility expenditure, so consider eliminating luxuries from your groceries and other utilities to avoid spreading yourself too thin during the personal loan repayment period.

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2. Consider Early Repayment

As stated earlier, a longer loan tenure translates to lower monthly payments but a higher total amount due to higher interest rates. However, you can lower the total loan amount by completing it before its tenure expires.

Early loan repayment has numerous benefits, including a lower interest on the loan, raising your credit score, and lowering your DTI, avoiding potential late payment penalties. However, its disadvantages include loan prepayment penalties.

Lenders institute loan prepayment penalties if the loan is completed before a specified point in the tenure to ensure they recoup their investment in the loan. Prepayment penalties are a percentage of the outstanding balance.

Loan prepayments invite opportunity costs because the lump sum amount used to settle the outstanding balance may have been put to alternative uses for growth. Also, an early loan repayment shortens your credit history of consistent payment and lowers your credit score.

However, some banks waive the prepayment penalty after a specified duration of the loan tenure. Therefore, consider the loan terms in the loan agreement to ensure an early payment is your best loan management strategy.

Special Types of Personal Loans

Besides the blanket secured and unsecured personal loan categories, below are special categories worth noting.

1. Debt Consolidation Loan

Debt consolidation is a loan management strategy that entails unifying or merging your credit commitments into one, allowing you to pay a single monthly instalment. Therefore, a debt consolidation loan is a personal loan taken primarily to pay off other creditors and remain with one monthly commitment.

Such personal loans are helpful when you have multiple debts. A debt consolidation loan means you are dealing with one lender and one due date rather than several. Therefore, it reduces the chances of some loans falling off the wayside, attracting late patent penalties. Also, a debt consolidation loan will improve your credit score in the long run, provided you maintain consistent payments.

2. Conventional VS Islamic Personal Loans

Conventional personal loans are loans accessed via non-Muslim lending institutions. Such loans feature interest rates on the loan amount as a charge to borrowers for facilitating credit access.

On the other hand, Islamic personal loans adhere to the Islamic teachings against charging interest, stipulated in the Quran and the Sunnah. Unlike conventional loans, Islamic personal loan lenders adopt mutual risk and profit-sharing principles. Under these principles, debtors sell an asset to the creditor, who sells it back at a profit; hence they use profit rates rather than interest rates.

Islamic personal loans offer borrowers less severe penalties for delayed payment than the compounded interest associated with conventional loans.

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Loan Rates Guide: Tips for Finding the Best Personal Loan Rates

• Check your credit report: Your credit report features your credit history and credit score, two factors lenders consider when deciding on interest rates. Address any flaws in your credit history to increase your creditworthiness.
• Improve your credit score: Besides catching up on delayed and defaulted payments highlighted in your credit history, you can grow your credit score by being a supplementary credit card holder.
• Use a personal loan calculator to compare personal loans among lenders to settle on the most affordable rates.
• Consider personal loans with shorter loan tenures to pay a lower interest rate in the long run.
• Include more supporting documents like bank statements, EPF statements, and tax documents to establish sound financial health.
• Watch out for limited low-interest rate offers by lenders.
• Negotiate for lower interest rates with the lender. Commercial banks have stringent rules governing their personal loan lending policies. However, you can leverage your creditworthiness and history of transactions with the bank to negotiate a more affordable rate. Alternatively, you can consider applying for personal loans with more flexible lenders like credit unions.

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Conclusion

Finding the best personal loan rates requires understanding personal loans, including the types of personal loans, loan eligibility, application, processing, comparing terms, and effective loan management. Fortunately, this guide offers a deep dive into all the highlighted personal loan properties, allowing you to make an informed decision. If you need any help with selecting the best personal loan for yourself, get in touch with LoanPanda experts today.

Resources:

https://www.hlb.com.my/en/personal-banking/blog/credit-scores-in-malaysia.html#:~:text=What%20Exactly%20Is%20A%20Credit,at%20getting%20a%20loan%20approval.

https://www.malaysia.gov.my/portal/content/31015

https://www.hsbcamanah.com.my/financing/products/personal-financing-i/

https://www.alliancebank.com.my/financing/personal/alliance-digital-personal-loan.aspx

https://www.ambank.com.my/ambank/SiteAssets/SitePages/loan/loan_personal_2_new/ListOfCompanies.pdf

https://www.mof.gov.my/portal/index.php/en/profile/divisions/registrar-office-of-credit-reporting-agencies

https://www.experian.com/blogs/ask-experian/what-is-a-hard-inquiry/#:~:text=While%20a%20hard%20inquiry%20will,be%20able%20to%20pay%20back.

https://ctoscredit.com.my/learn/5-common-misconceptions-credit-report/

https://www.investopedia.com/terms/d/debtconsolidation.asp

https://www.imf.org/external/pubs/ft/wp/2015/wp15120.pdf