By Eugene Chua
In SaveMoney.my's guide to Personal Loans, we've previously explained some of the things to look out for, including interest rates and early payment charges. This week we cover other penalties and guarantors.
Late Payment Charges
This is something charged to your personal loan if monthly instalments are not paid on time. For example, most banks charge 1% per annum on the amount calculated from the overdue date until the date of full monthly payment, but it is best to do some research, and most important - always ensure that you are punctual with your monthly instalments to avoid these extra charges.
Failure on Repayment
After a specified number of payments, if you are unable to pay back the principal amount and the interest charges of the loan, there are two possible consequences. One, the bank has the right to take legal proceedings against you; Two, the bank can off-set any credit balance in your account (maintained with the bank) against any outstanding balance in the loan account. If the personal loan is a secured loan, the lender can repossess the collateral or claim the outstanding amount from your guarantor. Beware: failure to repay will harm your credit rating and make it difficult or almost impossible get a loan in the future.
Collateral or Guarantor
A personal loan pledged with collateral or guarantor is called a secured loan. Collateral is when you fix your property or any fixed asset against the sum of money borrowed. In the event of failure on repayment, the lender will take the property attached to the loan to reimburse your outstanding amount. Another method to reduce the risk of failure on repayment is to require a guarantor when borrowing up to certain amount. If failure on repayment occurs, the lender claims the outstanding amount from the guarantor.
Personal Loan VS Credit Card for Borrowing
SaveMoney.my's advice, if you need a small amount for short-term personal use: using a credit card may be a better option compared to a personal loan, depending on the interest rate and time you need the money for. Moreover, they almost always provide a more flexible repayment schedule where you can pay the balance earlier or later without penalty (as long as you make the minimum repayments). Some banks even offer credit cards which have an easy payment plan at 0% interest rate for certain purchases.
Remember that personal loans are typically charged on a flat interest rate on full amount policy, the interest rate charged on credit cards are fixed interest rates based on reducing balance. Once you have spare cash and you pay a portion to the balance, interest will be recalculated based on the remaining balance. With a personal loan, whether or not you pay extra somewhere in the middle of the loan tenure, the interest is still calculated on the principal amount.
Example:
Patrick borrows RM10,000 from a bank (under personal loan) at a flat interest rate of 9% p.a. for one year
The total payment = RM10,000 x 1.09 x 1 = RM10,900
However, if Patrick applies for a credit card with an average rate of 12% p.a. on reducing balance, the total payment for the year is only RM10,661.88 which is RM238 less than the personal loan over the course of the 12 months.
A final tip when comparing the rates - be sure to convert the Personal Loan rate into an Effective Interest Rate first.
*Eugene Chua is the Finance Editor of SaveMoney.my, an online consumer advice portal which aims to help Malaysians save money through smart (and most of the time painless) savings in their daily banking, technology, and lifestyle spending habits.
