A personal loan does not come with any restrictions on how you can use the fund. Furthermore, the application process is not as cumbersome and time-consuming as some other types of loans, like a home loan.
But, like the two sides of a coin, while it might be easier to get approval for a personal loan, the cost of taking the loan could still put strain your finances.
Thus, if you have taken a personal loan or planning to apply for one, here are a few tips on how you can save on your personal loan repayment.
By working to repay your loan early, i.e. before the end of the tenure, you can save on the interest and liberate your cash flow. This will also improve your income to debt ratio, making you eligible for new lines of credit. However, we recommend you keep in mind a few things before going for an early settlement:
Rule of 78
Rule of 78 or sum of digits is used by banks to distribute interest/profit charges across the tenure. The method works in such a way that borrowers end up paying most of the interest during the first few months of taking the loan. The later payments are used to cover the principal amount that you have borrowed.
Interest payable per month = [(total number of instalments – number of instalments already paid) +1/ (sum of number of months)] x total rate
Most banks in Malaysia offer early settlement feature for personal loans. Consequently, you could save on the interest by closing your loan before maturity. However, your savings may not be significant because of this rule of 78.
Concept of Ibra
Ibra is a concept in Islamic banking when banks (at their discretion) offer a rebate to customers who settle their debt obligations, arising from sale-based contracts prior to the agreed settlement period.
You can save on your personal financing if the Islamic bank you are dealing with offers Ibra. The profit that you pay could be refunded if you want to settle your debt early. Read more about Ibra here.
Some banks have a lock-in period, which means you can settle the loan only after this period expires. This means that you will be required to make a minimum number of payments before you can pay off the loan.
Early settlement fee
In order to close the loan early, you might have to pay an early settlement fee, which will again take away from your savings. Usually, Malaysian banks charge RM200 or 1% of the approved loan amount, whichever is higher.
While opting for a personal loan, it is important to keep all these factors in mind. As a borrower, you will benefit from choosing a loan that does not charge early settlement fee or offers a rebate. You also need to remember that early settlement will require you to pay the full loan amount in one go. This might not always be possible unless you save up or come into money from a different source.
Part repayment of the principal amount
Part repayment is when you pay off the principal amount in a lump sum. By doing so, you are bringing down the principal amount, thereby lowering the interest you pay. The advantage here is that you can make multiple small payments to bring down the loan amount and save on your interest or time.
Part payment works only if you repay an amount that is significant compared to the amount that you have borrowed. What this means is if you have borrowed RM50,000, then you must make sure that your partial payment is at least RM8,000 to benefit from the lowered principal rate.
Not all banks allow part payment on personal loans, while some may require you to pay a part payment fee. While researching on personal loans, you may want to opt for one that allows part payment.
Refinancing is when you replace your loan with another loan. Although the concept of refinancing is normally associated with home loans, some Malaysian personal loans, like the Standard Chartered Quick Cash EDGE, allow refinancing.
If you have taken a loan from Bank A, you can transfer it to Bank B if the latter is offering you better repayment terms like a lower rate of interest or a flexible tenure. Refinancing is a good option if your current interest rate is high or the loan rates in the market have dropped. By shifting your loan to a new bank, you will be eligible for the new rates and can save on the interest.
Refinancing can also work for you if you have multiple loans to your name. By replacing all your loans with just one, you can save on the interest. This is called a debt consolidation loan.
Benefits of refinancing
- Save on your loan by lowering your rate of interest
- Reduce the tenure to pay off the loan faster
- Change a variable-rate loan to a fixed rate if you expect loan rates to increase
Consolidate your debt into one single loan (debt consolidation loans)
Although refinancing can help you save on the repayment of your personal loan, the new bank may charge you an upfront fee to refinance. This can easily offset the savings from refinancing. Also, keep in mind that you’ll need a good credit score to apply for refinancing or a debt consolidation loan, which might’ve taken a dent if you’ve been irregular with your past repayments.
Negotiating with your bank
This is one of the most straight forward ways of lowering your rate of interest to save on your personal loan. You could talk to your bank and ask to revise your interest. Negotiating with the bank can work for both new and existing customers.
Moreover, if you are an existing customer, make sure that you have made regular payments, ensure that your credit score has not dipped since you took the loan, find the current personal loan rates in the market and research on the interest rates offered by your bank to new customers. While this is definitely not a sure-shot way, you can still give it a try!
Hope our tips will help you make informed financial decisions in order to lower your personal loan cost.
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