Need to pay off high-commitment debt? Starting a business? Facing unexpected expenses? Personal financing could be your answer. In Malaysia, choosing the right plan can feel like finding a needle in a haystack. We’re using Bank Islam’s packages to show you why and how personal financing can make sense for you.
When is It Beneficial to Take up Personal Financing?
Here are some common reasons why someone might need a personal financing:
1. Reduce Profit Rate
Suppose you are burdened by a huge credit card debt, which continues to balloon over time due to its compounding at a profit rate of 18% per annum. In that case, it is wise to apply for a personal financing facility to pay off your credit card debt, as such a facility is offered at a lower profit rate, enabling you to save money significantly.
2. Fund Side Business Ventures with Limited Capital
Let’s say you’ve spotted a side business opportunity that could yield a handsome 25%-30% profit margin. The catch? You need RM 200k to make it happen, and you’ve only got RM 50k in your bank account. This is where personal financing comes in handy. By taking on RM 200k in personal financing, you can bridge the gap between your dreams and reality.
With the financing, you can launch your venture and aim for those high profit margins, effectively leveraging the financing to amplify your ROI. Meanwhile, your RM 50k stays in your bank account, serving as a financial cushion.
So, whether you’re looking to make bad debt better or leverage good debt for greater gains, personal financing can be the tool you need.
Why Islamic Personal Financing?
When it comes to Islamic personal financing offerings, three key features set the gold standard: competitive rates, transparency, and flexibility.
First, the rates are competitive, making your long-term financing payments more manageable.
Second, you won’t find any hidden charges, processing fees, or deposits, making the terms clear and straightforward.
Lastly, the flexible financing tenures allow you to choose a payment schedule that best suits your financial situation. These elements combine to make personal financing options some of the most competitive in Malaysia.
Shopping for the Best Personal Financing Offers
With comparison sites like iMoney and RinggitPlus, we could easily shop for Malaysia’s most suitable personal financing facilities. From my latest findings, I found Bank Islam’s offerings competitive. So, I’ll use them as a case study.
From their website, I learnt that Bank Islam offers three different personal financing facilities as follows:
- Personal Financing-i Package (Package)
- Personal Financing-i Non Package (Non-Package)
- Personal Financing for Professional Program (Professional)
Their similarities are on their size amount and tenure of financing offered:
- Minimum amount: RM 10k
- Maximum amount: RM 300k
- Maximum tenure: 10 years or till retirement age (whichever is earlier)
Their differences lie in:
- The profile of customers & eligibility requirements.
- Profit rate calculation
The Profile of Customers & Eligibility Requirements
The “Package” facility is catered for employees who are working in:
- The government sector
- Selected public listed companies
- Subsidiaries of government or selected public listed companies
- Other prominent private limited companies (recognised by Bank Islam)
The “Non-Package” facility is catered for employees of public listed companies without salary arrangement with Bank Islam.
The “Professional” facility is designed for working professionals such as doctors, dentist, accountants, engineer, lecturer, architects, safety officer, veterinary, optometrist, pharmacists, quantity surveyors and actuaries. The extensive list of recognized professionals can be obtained here. To apply for this facility, the professional would need to submit additional documents which relate to their profession. They include degrees and professional certifications.
Profit Rate Calculation
The 3 facilities are offered at the following profit rate:
- “Package” = Floating rate or Flat rate
- “Non-Package” = Flat rate only
- “Professional” = Floating rate only
Take the “Package” rate as an example. The 2 options are as follows:
1. Floating Rate (with Takaful):
- 1-3 Years: SBR + 2.67% a year (Daily basis on “monthly rest”)
- 4-10 Years: SBR + 2.77% a year (Daily basis on “monthly rest”)
SBR (effective on 5/5/2023) = 3.00%
2. Flat Rate (with Takaful):
- 1-3 Years: 4.20% a year (Monthly basis on “sum of digit”)
- 4-10 Years: 4.35% a year (Monthly basis on “sum of digit”)
So, which of the two options is better? Is it to obtain:
- 5+% in floating rate?
- 4+% in flat rate?
Fortunately, Bank Islam provided monthly installment tables for both options of financing: Floating Rate and Flat Rate. We can refer to the figures from flat rate, then convert flat rate into effective rate which can be compared with its floating rate offering. Here, let’s say we obtain RM 100k in personal financing for 10 years. In this case, our monthly installment would be RM 1,195.83.
To convert flat rate into effective rate, we would use the “IRR formula”, which is available with Google Spreadsheet. Here, I’ll share how you can do so in 3 steps as follow:
Step 1: Work Out the Cash Flow
So, when we successfully obtain RM 100k in personal financing, it is cash inflow at Year 0 as we receive the money right at the start. Then, we would pay a fixed monthly installment of RM 1,195.83 for 10 years (120 months). Hence, the cash flow would work out to be as follows:
Step 2: Use the IRR Function at Google Spreadsheet
At the bottom of “Month 120”, you may insert: “IRR(E3:E123)” as shown below:
You should obtain 0.64%, which is the effective profit rate on a monthly basis.
Step 3: Convert it to Annual Basis.
Finally, you can obtain the effective profit rate on an annual basis by multiplying 12. It works out to be 7.67% per annum.
Effective Rate per annum
= 0.64% x 12 months
So back to the question:
- Floating rate at 5+% per annum
- Flat rate at 4+% per annum
My take is 5+% a year at a floating rate. This is because 4+% per year in flat rate is equivalent to 7+% a year in effective rate (floating rate).
You can repeat the same calculation with the “Non-Package” facility, converting flat rate to effective profit rate and use this to compare with other facilities offered by Bank Islam.
3 Years, 5 Years or 10 Years?
Take a look at the monthly installment table for “Floating Rate under Package”.
If we obtain RM 100k in personal financing, your monthly installment would be:
- 3 Years = RM 3,027.26
- 5 Years = RM 1,927.71
- 10 Years = RM 1,104.19
Would you prefer to finance it in 3 years, 5 years or 10 years?
Personally, my take is this – If you like to lower your debt-service ratio (DSR) and boost flexibility in terms of cash flow, it would be ideal to go with 10 years. Your profit rate for 3, 5 or 10 years are more or less the same at 5%-6% a year. This means, choosing a shorter tenure doesn’t amount to much “profit rate savings”.
Takaful or Without Takaful Coverage
Takaful coverage is optional. So, is it worth it?
First, if you obtain the facility with Takaful, your financing would be fully settled in the event of death or total permanent disability (TPD). Your family would not be inheriting the burden of settling this financing. Thus, you’re rewarded with a lower profit rate for the financing obtained.
But, if you choose not to obtain Takaful, the profit rate for the financing shall be much higher. So, in the light of estate planning, it is more beneficial to include a Takaful coverage when applying for a personal financing facility.
Should you take up a personal financing facility?
I believe you should take up if you wish to:
- Consolidate bad debts into a single financing with monthly installments.
- Boost ROI of commercial projects with leverage.
The smarter way to shop for such facilities would be to know:
- How to compare similar facilities at comparison sites.
- The difference between floating rate and flat rate.
- Know the impact of your Debt-Service Ratio (DSR) and liquidity.
- How to cover your financing with Takaful.
For more details on Bank Islam’s personal financing packages, check out: