There are two types of personal loans – secured and unsecured loans.
There are two types of personal loans – secured and unsecured loans. In Malaysia, personal loans taken out by the general public tend to be unsecured.
Secured Personal Loan
A secured personal loan is essentially a loan where borrowers offer their assets, like a car or a home as forms of security or collaterals for their loan. As such, the cost of borrowing is usually much lower than that of an unsecured loan. However, borrowers should be wary of their financial capabilities of repaying the loan as they run a risk of getting their security assets repossessed should they fail to pay back the loan.
Unsecured Personal Loan
An unsecured personal loan on the other hand, is usually a bit more difficult to obtain as borrowers do not need to offer any form of assets as security. Hence, they would need to convince their lenders of their financial strength or credit worthiness. This is to ensure that the borrowers are able to pay back their loan.
With this, cost of borrowing for an unsecured loan is higher as the lenders are taking on a higher risk in providing the loan. Although borrowers do not provide any form of assets to their lenders for their loan, this does not provide them with an escape plan should they end up not repaying their loan in full. Lenders could still take the borrower to court in order to sell his or her assets in order to recuperate any losses.
Different Types of Personal Loan Interest rates
Interest rates for a personal loan can be categorised into two primary areas, fixed and variable. What borrowers should first bear in mind before taking out a personal loan is to figure out the interest rates that they are willing to take on. Personal loans in Malaysia are however generally more skewed towards fixed interest rate type.
Fixed Interest Rate Personal Loan
A fixed interest rate is an interest rate that stays the same for the full loan term. The rate will remain the same despite fluctuations in the market. While a fixed interest rate loan protects a borrower from interest rate movements, the repayment amount needs to be paid accordingly as per the loan agreement until the loan is paid in full. Hence, if a borrower wishes to make extra payments from time to time, he or she may be charged an additional fee.
Variable Interest Rate Personal Loan
A variable interest rate personal loan has an interest rate that changes from time to time, depending on the market rates. The advantage of taking out this particular type of personal loan is that a borrower could benefit when the market rates are low. However, this could backfire as well should the market rates go up as the borrower would end up paying more interest.
Find out which bank in Malaysia has the lowest personal loan interest rate here!
