Deep, deep dive
How do you choose a personal loan?
Personal loans ads will often say the key features of the loan they are offering include:
low interest rates and fees
up to 7-year tenures and high financing.
Low installments and longer tenures might seem like good reasons to take a personal loan but don’t be fooled. What you should be looking at is the total interest that needs to be paid over the lifetime of that loan.
Personal loan ads will say things like ‘attractive rates as low as 0.66% p.m., (‘p.m’ simply meaning ‘per month’, which is the rate that will be applied to your loan amount every month.)
In order to convert this to an annual or per annum interest rate (p.a.), simply multiply this number by 12:
To find out the true rates, always, ALWAYS look at the product disclosure sheet. Here is an example and we’ve boxed in red what you should be looking at:
What does the product disclosure sheet tell you?
- The interest rate is between 0.66% to 1.50% per month or 7.92% to 18% per annum. Guess what the 18% is very similar to what you’d be charged on a credit card!
- The effective interest rate is significantly higher (this is the interest you are paying if you include the effect of compounding)
You’ll find that the longer the tenure of your loan, the less you pay per month for any given amount of financing. BUT the total interest you pay will be much higher.
Suppose you borrow RM 10,000 at 0.66% interest per month for a loan term of 12 months. The total interest you’ll pay over the lifetime of the loan is RM 792.
However, if you decide to borrow for 84 months (7 years) because the monthly instalments are much lower, you’ll find that the overall interest you pay is RM 5,600!
|RM 10,000||RM 10,000||
|RM 344||RM 233||
|RM 12,400||RM 14,000||
Use the calculator provided to see how much interest and payments you’ll be making if you take a personal loan.
You might think the only cost you are paying for the loan is the interest cost. However, that’s not the case, you will also be incurring fees. In the snapshot below, we find that on top of the interest or profit rate they charge on the loan, they also charge you a one-time processing fee that can be as high as RM 400!
Make sure that you take the fees into account as well!