For a lot of people, a personal loan or an Islamic personal financing plan is regarded as the best thing since sliced bread. However, for those who have been burned, they would avoid a personal loan like a plague.
Personal loans exist for a reason and just like credit cards, they have gotten their less-than-shiny reputation due to frequent misuse of the facility. It is understood universally that borrowers have to pay off their loans based on the agreed timeline stipulated in the loan agreement. The onus is on the borrowers to ensure that they are able to pay off their loans before they decide to take them. So, you’d need to be in pretty serious need of the funds before taking up a personal loan.
Despite that universal understanding, some of the most common reasons people take up person loans are for vacations, home renovation, weddings, and even for purchase of big ticket items like a new surround sound system at home.
These are considered low priority spending and should be avoided if one does not have the cash to pay for them. Getting a personal loan for these items only spell trouble because personal loans do not come for cheap.
However, there are instances where you should definitely consider getting a personal loan or an Islamic personal financing plan to save yourself trouble and money in the long run:
1. To better manage your debts
It does sound ironic to take up another loan to cover your other debts, but sometimes it may be your ticket to being debt-free. If you know how to navigate around the traps!
If you currently have a few outstanding debts – like other personal loans and credit card balances – it makes perfect financial sense to consolidate your debts into one lower-interest personal loan. By doing so, you may be able to lower your overall interest payments, fix your monthly repayment, and also predetermine your settlement period. Not to mention the ease you’ll feel in managing just one repayment instead of multiple.
For example, using sample calculations with the Alliance Islamic Bank CashVantage Personal Financing-I, if you take a RM10,000 personal financing plan over three years, you will be paying RM336 with a 6.99% profit rate per annum. The total profit charges payable would go up to RM2,097.
On the other hand, paying off a RM10,000 balance on an 18% credit card will take you seven years and four months to pay off, and incur about RM4,055 in interest (if you are just paying the minimum payment every month).
Now, doesn’t a personal financing plan just make more sense in this scenario?
In this case, you will need a low-interest financing plan.
2. To avoid issuing a “bad” cheque
Although many of us can now use digital payments, there are times when we still write cheques for large payments. Using different payment methods for one account can lead to mistakes like having insufficient funds. If it results in a bounced cheque, you may be paying for your erroneous ways for a long time.
Did you know that Bank Negara (BNM) keeps track of all bounced cheques in Malaysia? DCHEQS (Dishonoured Cheque Information System) is a database system maintained by BNM to collect, process, store and generate information related to account holders who issue bounced cheques.
Account holders who issue less than three bad cheques within a year will have their details stored for a year. Those who bounce more than three bad cheques in a year will have their records kept in the database for three years.
This can result in the cheque issuer’s current account in Malaysia being closed for a specified number of months depending on the level of offence committed. This information on DCHEQS will also be available to other banks, leading to blacklisting your accounts in other banks as well. As long as the information is on DCHEQS, it can be used against you when you apply for any new credit or financing products.
In other words, you really do not want a “bad” cheque on your record. If there really is insufficient fund in your account for the moment, it makes sense to get a personal loan first to avoid having your cheque rejected by the bank.
However, as with all loans, ensure you have the means to make the payment according to the agreement.
For this instance, it makes sense to get a loan that provide fast approval and disbursement.
3. To improve your credit score
Using a low-interest personal loan to pay off your credit card balance doesn’t just save you money, it can save your skin, too (not literally)!
Credit cards are similar to a revolving line of credit, where the lending institution grants you a maximum credit limit, which you can use to make purchases at any time. However, it is difficult to repay a huge balance and free up the credit limit due to the compounding interest.
Personal loans, on the other hand, carry fixed interest rates that do not change during the loan terms. As long as you service your loan on time and according to schedule, the loan will be paid off at the end of its term.
An important part that makes up our credit score is our credit utilisation. This means the percentage that you use on your credit limit – the lower the better, of course. Taking up too much of your credit limit in a revolving line of credit, like a credit card, can cause a score reduction.
Check your iMoney Creditscore for free here and find out how you can increase your chances of being approved for your next loan application.
By using a personal loan to pay off your credit card debt or other revolving accounts, you will be able to immediately lower the utilisation ratio because personal loans are considered instalments and not revolving accounts.
Over time, if the consumer repays the personal loan without increasing credit card balances, scores can continue to rise.
In this case, you need to choose a plan that cost the least for you.
4. To pay for a medical emergency
The pain and struggle of not having a medical insurance is only known to those who are suddenly thrown into a world of chaos when they are diagnosed with a long and painful illness that results in a huge medical bill.
If you or your family member do not have a medical insurance, or have one that exempts certain condition, you may not be able to pay for the cost of an operation or expensive medicines.
In this kind of sticky situation, taking out a personal loan may be your safest option. Your physical health should always take precedent to your financial health.
In this case, you don’t have to take out a lump sum of cash up front, and will be able to split the payment into years to make it easier on your finances.
Depending on the amount you need, it is good to look for personal loans with high maximum loan amount and tenure.
Personal loans are not evil and you can borrow responsibly. It only leads to trouble if you are unable to control your finances and your payments.
As personal loans in Malaysia are unsecured, it is perfect for borrowers who need fast cash and do not want to put up any collaterals, and still enjoy fixed rate and payment. The key to not accumulating an insurmountable debt with your loan is: always be prompt and up-to-date with your credit repayments – be it personal loan or others.
This article was first published in 2015 and has been updated for freshness, accuracy and comprehensiveness.