Personal Loans - things you need to know

ringgitplus

27th March 2013 - 6 min read

Glancing through our archives we’ve noticed that we’ve churning out quite a few pieces on personal loans deals and promos without stopping to think that somewhere out there is a segment of our readers who may not even understand what personal loans are all about.

It may be shocking to read but there a lot of people out there who are unfamiliar about personal finance management but are afraid to ask. Of course in today’s knowledge driven economy it’s absolutely understandable. Nobody wants to feel stupid by asking about stuff that seems so basic.

Us guys at RinggitPlus totally get this, that’s why to get you started on the fast track to financial freedom we’ve compiled a mini-introduction to personal loans.

Personal Loans – What’s It All About

To put it simply, personally loans are money you can ‘borrow’ from a financial institution at an agreed interest rate which you will be able pay back slowly in a few years. People use these types of loans for a variety of pursuits: buying a car, paying for uni fees, making your dream wedding come true, ordering a Siberian Husky off eBay, anything really as long as it’s not for business purposes.

There are two kinds of personal loans:

Secured personal loans: These loans come with a guarantor or collateral in the form of a property or land attached. Should the loan applicant fail to make his payments the bank has the right to seize the collateral or shift responsibility of payment to the guarantor. Secured personal loans are usually made by individuals who do not have good credit history but it can also be used to secure interest rates much lower than industry standards.
Unsecured personal loans: These are more common and do not require the applicant to put up any collateral or guarantor. Unsecured personal loans generally take less time to approve and hassle free as you can apply for it online. The downside of this convenience is a higher interest rate.

Which One is Better for Me?

Unfortunately there is no one right or wrong answer for that. It really depends on your financial standing and reasons for getting a loan. If you are in need of emergency cash to fix your roof and are sure you will be able to pay it back in a couple of years then an unsecured personal loan is your best bet.

But if you’re a fresh grad for example who has been bumming for the past three years since you graduated and in need of a car to get to work then getting secured personal loan with mom and dad in tow might be a safer choice.

Some really smart and experienced people opt for loans even though they can afford it. For instance, instead of dipping into your savings for a new car you could instead secure a car loan and keep your money for more fruitful investments.

Things To Look Out For

We’ve all been told repeatedly to read the Term & Conditions carefully, but frankly the way those things are worded it’s not surprising that so many people are still clueless when it comes to our personal finances. When in doubt a simple phone call or face-to-face with a bank officer might help. The downside to this is that he/she might spout out a slur of bank jargon and terms and this can be very intimidating. The good news is that by learning a few common key words you can ask specific questions and actually get information that is relevant to your needs.

Per annum (p.a.) – The amount of interest rate you will be charged per year for the duration of your loan. For example a RM10, 000 loan at 11% p.a. rate stretched out over five years will amount to RM5, 500 in interest charges which means you will have to pay back RM15, 500 in the course of five years. As you can see the longer it takes to settle your loan the more you will have to pay.
Principal – The initial amount of money that you loaned. Going by the example above the principal amount would be RM10, 000.
Tenure – The number of years you are expected to pay back your loan. The longer your tenure the more interest you have to pay.
Installment – The amount you have to pay each month. This is calculated based on the your initial loan plus interest divided by the number of months in your tenure.
Default – In banking terms it means that a person has failed to pay their monthly installment. This is a scenario we want to avoid.
Penalties – In the event that you are unable to make your monthly installments you will be penalized with additional charges. Most banks apply a 1% penalty but always check beforehand!

Making the Best Out of Your Debt

You must be feeling a whole lot more confident right now. As you can see, personal finance is not that hard once you strip off the convoluted language and terms. Now that you’ve got the basics down pat you should know that on top of the loan you are entitled to a few additional perks as well. The benefits vary from bank to bank but the most important thing to remember is that they all want your money so go on out there and exercise your right as a consumer and make them work for it!

Examples of extras you can squeeze out of your loan provider:

Cashback rebates – Some banks offer cashback if you have been good and been keeping up with your monthly payments.
Free gifts – Watches, mobile phones, and discount coupons are just some of the things they like to throw at us to get us to sign on.
Insurance coverage – These are optional and are not completely free of charge but it’s nice to have options.
Points reward system – Like points you accumulate with your credit card but this is based on your loan amount.
Service fee waivers – A lot of banks are trying to attract customers by absorbing the cost of processing fees. Some are even bold enough to promise lower interest rates should they fail to contact a customer within 48 hours.