The Many Types of Loans in Malaysia
If you walk into a bank today there are many loan products available. Borrowers are spoilt for choice. Which is the one suitable for them. To me, the lowest interest rate package is not necessary the best. It depends on the borrower's objective. There are many types of property loans but I sum up in these few categories.
This is the most basic. It includes paying principal and interest together. The term loan has a maximum tenure years of 35 years or age 70 years old in Malaysia.
Purchase Price RM 500,000
Tenure: 35 years
Effective Lending Rate: RM 4.5%
Monthly Instalment: RM 2,129.66.
RM2,166 consists of RM442.16 principal RM1,687.50 interest
Gradually as months goes by the principal will increase and interest will reduce. That's how you will finish your loan in 35 years.
Please be aware that most banks have a penalty clause between 2 to 5 years of around 3% if you were to settle the sale of the property earlier.
In overdraft the borrowers only pay interest. Using the previous example the interest payable monthly will be RM1,875. There is no tenure year attached with an overdraft. Borrowers who pay more than the interest charge will reduce the principal. Overdraft uses current account facility. Borrowers can make prepayment at any time. It is more flexible than term loan but the interest rate is higher. Nowadays it's more difficult to get banks to lend pure overdraft. It will be easier if there is a mixture between term loan and overdraft.
Flexi or flexible loans means it is a combination of term loan and overdraft. Borrowers still need to pay the minimum monthly instalment. Any extra payment will go towards reducing the principal and thus, in turn, will reduce the tenure year's payable. Instead of putting your money in different accounts you can lump in a flexi loan.
Every time your money is in this account you will save on the interest. It functions as one account. Borrowers need not give any notice for any extra payment unlike in term loan. Any extra money in the account, borrowers can withdraw at any time.
Please be aware that once you draw out, interest will be charged back. It uses the current account. Borrowers will be able to use ATM, cheques and also online banking for their transactions. It is a good package in which it can save a lot of interest if the borrowers use it to their advantage.
Fixed Rate Loans
As the name suggests, it means interest rate is fixed for the whole tenure. Banks have this package under Islamic loan. The interest rate is much higher than those conventional loans. Some insurance companies (not under Islamic product) also have a similar package but with a lower interest rate. Borrowers who are worried about escalating interest rates will go for this package. You do not have to worry about the interest rate.
Islamic loan uses Murabahah concept under the Syariah principles. Under Islamic concept of borrowing, the banks will buy the property from the borrower, then rent it back to them. The bank will determine the profit rate in advance after considering the tenure years.
Initially, the interest rate is fixed but as time evolves, a floating rate was introduced.
In recent years there was a spike in Islamic loan applications especially property investors. Why is that so? In Islamic loan, the banks cannot charge a penalty for early redemption. Property buyers with an objective of very short borrowing time frame will opt for this package.
Please make sure to read the letter of offer from the bank before signing. In certain banks, they will have a special clause for this package. Make sure you understand the special terms before signing.
I hope that this article will give you more insight when choosing which loan package to take. If you would like to read my other articles, go to www.miichaelyeoh.com