Understanding Different Types of Loans

Understanding Different Types of Loans

Borrowed money, or loans, can be used for many different things.  It can range from funding a new business, to buying a car, or even investing in a new home. As such, there are just as many different types of loans out there for you to choose from.

However, which is best, and for which purpose? Knowing the difference can help you pick out the best loan that will fit your needs. Here are some of the most common types of loans and how they work.

Generally speaking, loans come in two forms. The first is fixed rate loans, where interest rate and monthly installments stay the same throughout the loan period. Another is variable rate loans, interest rates are pegged against the Base Lending Rate (BLR). Individual banks will determine their own BLR which is based on the cost of borrowing money that will be lent out. 

Loans vs Financing

You will sometimes see products like Personal Loans and Personal Financing. In general, both are similar financial products that help you get the funding you need to achieve a goal. The main difference is that the term financing is used for Shariah-compliant products.

With that out of the way, here are some of the most common types of loans and how they work.

Personal loans

These are the kinds of loans that we think of when someone mentions borrowing money. Personal loans actually cover a wide range of loans, but in general are the most basic money borrowing transactions. They what we call term loans, which must be repaid by instalments over the loan period.

If you breach the terms of the loan agreement, the bank can recall the loan, which is a demand for the borrower to repay loans immediately. They are most commonly used in situations that require a large sum of money, but smaller personal loans can also be made.

Secured and unsecured loans

Personal loans can be divided into secured and unsecured loans. A secured personal loan is essentially a loan where borrowers offer their assets, like a car or a home as forms of security or collateral.

This means that secured loans tend to offer better interest rates than unsecured loans. However, you do run the risk of having your belongings repossessed if you fail to pay back the loan.

Credit cards

Credit cards are technically another form of loan known as revolving loan. This means that you are allowed to use the money up to an agreed credit limit whenever you need it. Once you repay the amount owed, the credit becomes available to draw on again. Its uses are quite similar to personal loans, but there are quite a few key differences. 

For one, personal loans can offer you a lump sum of money and have relatively lower interest rates than credit cards but must be repaid over a set period of time. On the other hand, credit cards provide ongoing access to funds and you only really pay interest on outstanding balances leftover at the end of the month. Credit cards also offer you additional bonuses like cashback or bonus points for using them to pay for things..

Home loans

As the name suggests, home loans are intended to help people buy a home – or other property. Buying a new home and applying for a home loan can be complicated as there are many other costs involved. You will need to do quite a bit of homework to figure out just how much buying a house costs. 

If you are unsure about where to start, iMoney has an article on how home loans work for you to refer to. Additionally, you can read about some of the common home loan mistakes to avoid here.

Car loans

Just as the name suggests, a car loan is a type of loan usually taken out to fund the purchase of a car. Generally speaking, car loans are unsecured loans. Meaning that you borrow money from the bank, interest is calculated based on the cost of the car, and you pay the bank back with said interest. There is no collateral from the borrower, but the bank can recall the loan should you fail to repay the loan, resulting in you having to pay back the loan immediately.

Another type of care loan is a hire purchase agreement. Under this agreement, you can purchase the car you want, but ownership does not transfer to you until the final repayment is made. This means that the car actually belongs to the bank until the end of the loan.

Business loans

As the name suggests, a business loan is a loan specifically intended for you to use if you operate a business. You can choose to apply for different types of business loans that banks offer, and some are even tailored specifically to the size of the business.

For example, you can use these type of business loans to help fund the purchase of premises for your business, to help you buy stock, or to cover operating costs. 

Microloans

Microlending is a type of business loan but on a much smaller scale. It is  designed for use by small businesses. Malaysia also has another form of microlending called microcredit. This aims to extend microloans to borrowers who lack collateral, steady employment, and a regular credit history.

According to Bank Negara Malaysia, there are seven banking institutions and three development financial institutions (DFI) that offer microloans. These include:

Banks

  • Alliance Bank Malaysia Berhad
  • AmBank (M) Berhad
  • CIMB Bank Berhad
  • Public Bank Berhad
  • Malayan Banking Berhad
  • United Overseas Bank (Malaysia) Bhd
  • Bank Muamalat Malaysia Berhad

DFI

  • Bank Pertanian Malaysia Berhad (Agrobank)
  • Bank Kerjasama Rakyat Malaysia Berhad
  • Bank Simpanan Nasional

Hopefully, this gives you a better understanding of the kinds of loans available and which one you should be aiming for based on your needs. If you are not sure which lender to approach, iMoney can help connect you to a variety of lenders that offer all kinds of loans. Just go to www.imoney.my and select the ‘Loans’ tab to find out more.

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