Personal loans: Are you taking it for the right reasons?

While there are many common types of loans in Malaysia, from loans for cars to education, to housing, as well as business and investment-specific loans such as Amanah Saham Berhad, this article deals specifically with personal loans.

The range of available personal loans in Malaysia are rather interesting. We have options for Shariah-compliant loans, civil servants’ loans, and even blacklisted loans (often illegal).

In general, personal loans generally have the following characteristics:

  • Higher interest rates than “strategic” loans (car, house, business loans etc). The rates are highly dependent on your credit score. If you are blacklisted, you’ll probably never get good rates.
  • No collateral (No need to promise the bank your car or your house if you can’t make payments).
  • Relatively short repayment term – usually between six months to five years.

Like other financial tools, you can use personal loans to your advantage. Here are some good and bad reasons to get a personal loan.

Good reasons to get a personal loan

  • You want to pay off a high-interest debt

Say you have credit card debt at 18% per annum (higher interest), and qualify for a personal loan at 10% per annum (lower interest). Take the loan – it’s a smart move. You’ll still have to make payments, but now at least you get to save some money in interest payments.

Borrow just enough to pay the credit card debt (or any other high-interest debt), but no more than that. Pay off the credit card balance in full. Make solid plans to pay off the personal loan according to the agreed schedule. Auto-deduct it from your bank to avoid any late penalties.

  • You want to scale up your business

This is only for businesses already in operation, that just need a bit of capital to expand and grow. If you want to start your own business, many experts agree that the capital should come from yourself first.

Calculate how much you need. Make plans to ensure a positive cashflow so you can make the loan payments.

  • You want to pay medical expenses for loved ones

Rather than a good reason, this is an ethical reason. Unfortunately, this is one of those “win/lose-lose” situations – if your loved one heals, you have to repay the loan. If they don’t, you still have to repay the loan.

Keep in mind that 14.3% of debt defaulters in Malaysia were declared bankrupt due to medical expenses.

  • You want to leave an abusive household

Well, it’s better if you can save up/borrow money from friends for this, but if you have no choice, go ahead and get a personal loan to help you move out. This is especially true if you are physically and emotionally abused, and have children in your care. Get out of there, and find a secure location as a new base.

You need about four months’ worth of rental deposit, then living expenses for about three to six months. Factor in your moving costs. Get a support system as soon as you can. Get a job as soon as you can. Get whatever help available – from public or private agencies – immediately.

  • You have unexpected repairs to pay for

A sudden burst pipe in your home? Car suddenly breaks down? Get a loan if you can’t afford to finance these repairs yourself.

Bad reasons to get a personal loan

  • You want to keep up the illusion of wealth

This means adding on a personal loan on top of your current debts, for non-necessities. Borrowing money to appear wealthy is common. This is hard, we have the “saving face” culture. This includes borrowing money for:

  • Weddings
  • Holidays
  • House renovations that are purely cosmetic in nature
  • Designer clothes and accessories
  • Relatives’/friends’ “investment opportunity” that you’ve been pressured into joining
  • Luxury, non-practical cars
    Studying overseas instead of locally
  • You want to start a business

Venturing into your own business for the first time? It isn’t recommended that you risk putting all of the capital/personal loan money into it. Bear in mind that 96% of all businesses fail in the first 10 years.

  • Gambling

Getting a personal loan just to gamble it away is a serious issue affecting many people. Seek help and find support for gambling addicts. These are not Malaysia-specific but may help: Gamblers Anonymous UK and Gambling Help Online. r/problemgambling has some resources for people who struggle to quit.

Conclusion

Having no debt (including “good debt” like mortgages) is the way to go. But since most, if not all of us have debts from loans, the least you can do is to always be aware of your interest payments.

A 4.5% interest is fairly low. You’ll find that a typical credit card has 1% interest. Personal loans usually vary on your risk profile, ranging between 7% all the way up to about 30% (more than that is not uncommon, too) per annum.

This article first appeared in ringgitohringgit.com

Suraya is a corporate writer-for-hire and the blogger behind personal finance website Ringgit Oh Ringgit. She is more of a minimalist, less of a consumerist, a konon DIY enthusiast, a let’s-support-small-businesses-over-big-corporations kinda girl. Prior to her current role, she worked in various capacities within the non-profit industry.