How does Personal Loan work?
In this article, you will find out the do’s and the don’ts of personal loan application based on experiences and best practices of ordinary Malaysians.Read on to learn what a Personal Loan is about, so you will uncover various answers to questions you might have about personal loans, and how you can use this information to make an informed decision.Put simply, a personal loan is a sum of money with interest lent by the bank to a borrower for a fixed period. The loan must be paid back in fixed amount installments, every month until the end of tenure.It is quite straightforward until you come across some terms and jargon that you are not familiar with. Don’t worry, here are some commonly used terms to describe personal loans:
Term 1: Per annum (p.a.)
The interest rate will be charged on a per-year basis. If a RM10,000 loan is at 5% p.a. interest, the interest charge is RM500 per year. Now, if the repayment tenure is stretched to 3 years, the interest will become RM1,500 (RM500 per year x 3 years).
Term 2: Principal
The amount of loan you applied for. The interest rate will be calculated based on this amount and added on top of it. Going with the example above: Principal + Interest = Total Borrowing Amount (RM10,000 + 5% p.a. =RM10,500).
Term 3: Interest Rate
Interest rate is charged on the loan amount by the bank to the borrowers for using its money. It’s the same concept as deposit; you put money in a savings or current account, the bank will pay you interest or profit for using your money.
Term 4: Tenure
The loan repayment period. Choosing the right tenure is important for your personal finances. Shorter loan period comes with higher monthly installment amount, whereas longer loan period comes with higher interest rate.
Period: Shorter (1-3 years)
Interest charge (Low): RM10,000 x 5% x 1 year =RM500
Monthly Installment (High): RM10,500 ÷ 1 year =RM875 per month
Period: Longer (4-10 years)
Interest charge (High): RM10,000 x 5% x 10 years =RM5000
Monthly Installment (Low): RM15,000 ÷ 10 years =RM125 per month
Term 5: Installment
You need to pay back your personal loan every month until the end of tenure. Installment amount is fixed, which is calculated on the total borrowing amount then is divided by the total numbers of months.
Term 6: Default
The term to describe an event of non-payment of a personal loan for over 3 months. In this situation, the bank will usually impose a higher finance charge and/or take a legal action against
Get in touch for consulting or advising to all of your questions.