By Diana Chai
Since putting up our comparison tool on personal loans; our lines have been buzzing with activity. There’s no denying that personal loans are a hot banking product. And why wouldn’t it be? Cash is king in every situation so if you truly needed a little financial lift; having money in hand beats a credit card. For some; taking out a personal loan with a low monthly instalment amount is the easiest thing; almost akin to feeling like you are getting ‘free money’. All you have to do is fill a form and money is given to you. The minimal RM200-300 per month you pay is barely enough to get you thinking so you pay it without much attention.
But if you did calculate the total amount of interest and fees you are paying over the years; you may be tempted to rethink that loan. Read on to find out exactly how much a personal loan can cost you.
Even at the moment of taking out a loan; there are preliminary charges you may need to pay. How much these charges come up to; will depend on your bank. Typically, there are two kinds of preliminary fees: stamp duty and processing fees. Stamp duty is calculated on the amount borrowed at a rate of 0.5%. Processing fees are usually charged lump sum and the amount is usually in the region of RM50.
Example: for a loan of RM5000; stamp duties will be RM25 and processing fees RM50. Preliminary fee total will be RM75.
Interest fees and tenure
There is a large variance of interest fees depending on the bank; how much you borrow; and your current credit rating. The range starts at 7.5% up to 13.5%. Civil servants are able to take cheaper loans with non-commercial banks at rates as low as 4.5%. However, you can be sure that the longer you stretch repayment; the more interest you will be paying. The examples below consider an RM5000 loan with an average interest rate of 9% on 2 different loan tenures.
Scenario A (2 years)
Scenario B (6 years)
Monthly repayment: RM245.83
Monthly repayment: RM106.94
Total interest paid: RM900
Total interest paid: RM2700
In scenario B, though you pay approximately RM150 less than in scenario A, you’re also paying three times the interest. If you can afford an additional RM150 per month; best to clear the loan as quickly as you can.
Late penalty fees
Sometimes life just happens and you may find yourself missing your payment or being late. Even a day over your due date will result in late payment penalty fees. Late payment fees for most banks are set at 1% of the amount in arrears.
Example: if you have missed one month’s payment at (RM245.83), the late penalty fee with be RM2.46.
Early settlement fees
For banks, early settlement of your loan means they lose out on the interest they would’ve earned if you had gone ahead with the full tenure. As such, early closure of an account can result in a minimum fee of RM200 or 3% of the remaining amount – whichever is higher.* Not all banks will charge early settlement fees, but the ones that do usually follow this rate.
Example: if you have RM2000 remaining to be repaid of your principal; the early settlement fee will be RM200 (because 3% is only RM60).
In total, as per the examples above; taking a loan of RM5000 for 6 years will result in the following fees:
9% interest for 6 years: RM2700
Preliminary charges: RM75
Late penalty fee for three months of late payment: RM7.38
Early settlement fee (an approximately RM2000 remaining balance): RM200
As seen above, paying more than 50% of the loan amount in fees and interest is a very expensive way to obtain extra cash. If the reason you need the cash can wait; opt for a high interest savings account and save or if you really do need the lump sum quickly; endeavour to repay the loan as quickly as possible.