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When you think about borrowing money, there are
several things to consider. Ideally, you should be able to:
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• Identify a variety of sources and institutions which lend money
• Evaluate the terms of the loan
• Know how to calculate the cost of credit
• Determine your own debt limit
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When you take out a loan you have to be aware of how much you need to set aside from the outset. For most loans, you will usually require a down payment which will be a percentage of the total loan to be taken. This could range from 10% to 25% of the loan depending on the type of loan, the loan amount, your exposure to other loans and your credit worthiness.
On top of that, you will need to allocate for your monthly instalments coupled with the interest charged. This again would depend on the loan period and the interest rate to be charged by the financial institution. Finally, you will also need to allocate for your road tax, insurance, other taxes such as quit rent or house assessment. All this would again depend on the type of loan you have applied for.
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Credit costs money! The cost of credit will vary considerably depending on the method used to calculate the balance on which you pay a finance charge. It is often difficult to figure out the finance charges once you start using a credit card regularly and carrying a balance on it. The bottom line about finance charges on credit cards is this: Try to pay off your credit cards each month. If you can't afford to pay off your credit cards each month, make the largest payment you can afford, and pay the card off before you make another purchase.
Different credit card issuers may offer different interest rate plans. Make sure you understand the interest calculation method before you roll over your credit balance.
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Hire Purchase
In Malaysia, one of the most common ways to own a car or motorcycle is through hire purchase. This is the hiring of a motor vehicle with the option to purchase it and you have to sign a hire purchase agreement with the finance company.
When you take out a hire purchase facility, you are hiring the car from your finance company which is the owner of the vehicle. The finance company pays the seller (usually a car manufacturer/distributor or second hand car dealer) for the car while you pay the finance company a down payment for the car and a predetermined amount monthly to cover the total purchase price of the car for a number of years. The interest rate for hire purchase is usually fixed and pro-rated in the pre-determined monthly amount over the number of years of the facility.
Only when you have fully settled the loan and all outstanding charges is ownership of the car transferred from the finance company to you.
Home Loans
Home loans are also a very common form of financing in Malaysia. When you decide to buy your dream home, you would usually go to a bank to get financing to purchase your new home. This works in the same way as a hire purchase facility but, instead of a hire purchase agreement, you will sign a loan agreement with your lending bank.
The bank pays the seller (usually a property developer or an individual if it is a second hand house) for the home while you pay the bank a lump sum as down payment and a predetermined amount monthly for a number of years.
The loan amount and the repayment period would depend very much on your financial ability to repay the amount to be borrowed as well as your age. The older you are the shorter the repayment period as it is usually linked to the time that you are employed. You are usually deemed unable to service the monthly installments once you cease employment as you will no longer have a steady income stream.
Only when you have fully settled the loan and all outstanding charges is ownership of the home transferred from the bank to you. Interest is charged as a percentage above the Base Lending Rate (BLR). This interest margin usually fluctuates in accordance with the economy of the country as well as the financial performance of the lending bank.
As alternative home financing, you can also take out a loan from your insurance company or make a withdrawal from your EPF savings to pay towards the purchase of your home or reduce the loan amount from time to time.
Refinancing home loans is quite common and usually occurs when you feel the bank you have borrowed from is charging exceptionally high interest versus other banks. However when you decide to refinance your home with another bank you will have to sign a new loan agreement with the new lending bank and this may involve legal fees. In order to justify refinancing, you will have to compare the cost of getting a new loan together the total RM amount and interest you will save against the cost of maintaining the old loan.
Personal Guarantees
For any loan, a financial institution will usually conduct a credit assessment on the loan applicant to determine his or her credit worthiness. Based on the result of this assessment, the financial institution may require someone to act as your guarantor for the loan facility you are applying for. This is additional security for the bank on top of the car or home which the financial institution uses as collateral in the event you default in your monthly instalments.
If you are asked to stand as a guarantor for your friend or relative, be wary because if the borrower defaults on any payment you will become liable for the outstanding part of the loan together with the interest due and any other penalties charged by the financial institution. As a personal guarantor, the financial institution can insist that you repay the full amount that is outstanding whereas the car or home remains in the name of the borrower.
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When you take out a loan you have to be aware of how much you need to set aside from the outset. For most loans, you will usually require a down payment which will be a percentage of the total loan to be taken. This could range from 10% to 25% of the loan depending on the type of loan, the loan amount, your exposure to other loans and your credit worthiness.
On top of that, you will need to allocate for your monthly instalments coupled with the interest charged. This again would depend on the loan period and the interest rate to be charged by the financial institution. Finally, you will also need to allocate for your road tax, insurance, other taxes such as quit rent or house assessment. All this would again depend on the type of loan you have applied for.
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Read more
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