Personal loans are definitely helpful when you are in dire need of funds. You may find yourself applying for a personal loan for various reasons such as for your education expenses or to renovate your house.
Personal loans can also be very useful for wedding expenses, taking on a course, clearing credit card debts, or even to launch or rescue your business.
The key is — you take a personal loan only when it’s required and use it wisely. Personal loans generally come without any collaterals and hence attract a higher rate of interest than home loans and car loans.
The rule of thumb being, consider taking a personal loan only if you’re unable to gather funds from other sources.
Personal loans are quite common in Malaysia, but you need to make sure that you do not get into a problem while you bag one. Many of us often overlook certain critical things that either put us in an avoidable debt or undermine our chances of getting a personal loan.
So here are 7 common mistakes you must avoid while applying for a personal loan:
1. Miscalculating the true cost of your personal loan
Probably the most common mistake that people do while securing a personal loan is to miscalculate its true cost, which is often higher than the advertised rate of interest.
Let’s say, for example, you have borrowed RM20,000 at an interest rate of 8% p.a. for a tenure of 4 years (48 months). You could calculate that the total interest that needs to be paid is RM1,600.
But in reality, the interest will be calculated as (8%X4=) 32% of the principal amount, which is RM6400, and in total, you’ll need to pay (principle RM20000+RM6400=) RM26400. So your monthly instalment would be (RM26400/48) RM550.
So the true interest you pay is RM6400, not RM1600 that you might have miscalculated initially.
So whenever you come across a personal loan with low-interest rates, try to calculate the true interest rate before you go for it. The true interest rate is called effective interest rate (EIR) which will usually be mentioned in the product disclosure sheet. In fact, Bank Negara Malaysia has mandated all banks in the country to disclose this information.
2. Agreeing to the first loan that was offered to you
When you are in an urgent need of money it is definitely easy to say yes to the first loan that is offered to you. But such a hasty decision can sink you into debt especially if you end up choosing an expensive loan.
In such cases, you need to make sure that you can repay the full loan amount with ease.
It’s always advised to check and compare interest and profit rates, eligibility requirements and other information before you sign up for one.
3. Not planning in advance
As discussed in the first point, many of us miscalculate the true cost of a personal loan in the desperation of getting one. This also happens because we do not plan in advance.
Apart from doing proper research to get the best rates, it is also very important to figure out how exactly are we going to repay the loan. The first step is to see how much strain the new instalment will add to our budget and then decide accordingly.
Due to lack of proper planning, we struggle to pay instalments every month and miss deadlines which results in penalties. In doing so our credit score takes a body blow as well.
So plan meticulously before taking a personal loan, and do not miss even a single instalment after you’ve got one.
4. Not reading the loan contract details
Imagine a scenario: You might be in dire need of funds today and hence considering taking a personal loan for 4 years. But say, after 2 years, you have enough money to repay the remaining loan amount and don’t see why should you continue with your monthly instalments.
So you dial up your bank to know how can you prepay the remaining full loan amount, but alas, your bank doesn’t allow loan prepayments.
And you wonder, “Why didn’t I read the detailed terms and conditions before applying for this loan?”
A lot of critical information, like prepayment options, is provided in the terms and conditions of a loan contract which we are too lazy to go through assuming we know everything.
So, don’t make the mistake of skipping reading the loan contract details.
5. Not disclosing full information
Remember that not disclosing true and full information while applying for a personal loan can result in bad consequences for you. Ensure that whatever personal or other details you fill in on your loan application are true and precise. Banks can verify whether the information you provided them is true or not. It could be your working status, contact information, residential address and/or income statement.
If you have not disclosed everything or falsified any information, banks can take legal action against you. If the loan was already granted to you, you will have to repay it immediately in full. Additionally, you can be charged with penalty fees for committing fraud.
6. Not maintaining a good credit score
Maintaining a good credit score is imperative if you want to apply for a personal loan. Banks will access it on their own, even if you don’t produce it.
That means you must ensure that all your previous loans and bills, like credit card bills, are cleared before you apply for a loan.
The bottom line being, be punctual in paying your existing debts to maintain a good credit score.
Reach out to Bank Negara Malaysia’s Credit Bureau to access your detailed credit report.
7. Taking a personal loan for someone else
At times you may find that your friend or relative may be in dire needs of funds. They may not be able to take up a personal loan in their name due to various reasons. If you think you are doing them a favour by taking up a personal loan in your name for them, think again.
If they are not able to repay the loan for any reason, you will find yourself in unnecessary debt. You have to pay back the loan because it is in your name. If you are not able to pay the monthly instalments, then it will affect your credit score and you may incur penalty charges.
Overall, it is best if you do not borrow for others. Rather, check for ways where you can help them to get a loan in their own name.
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