If you walk into a bank today, you are spoilt for choice for the many loan products available. Which is the most suitable one? In my opinion, the lowest interest rate package is not necessary the best. It depends on the borrower’s objective.
This is the most basic. It includes paying principal and interest together. A term loan has a maximum tenure years of 35 years or age 70 years old in Malaysia.
Purchase Price RM 500,000
Tenure: 35 years
Effective Lending Rate: RM 4.5%
Monthly Instalment: RM 2,129.66.
RM2,166 consists of RM442.16 principal & RM1,687.50 interest
Gradually as months goes by the principal amount will increase and interest will reduce. That’s how you will complete your loan in 35 years.
Please be aware that most banks have a penalty clause between 2 to 5 years approximately 3% will be charged if you were to settle the sale of property earlier.
In overdraft, a borrower only pays interest. Using the previous example the interest payable monthly will be RM1,875. There is no tenure year attached with an overdraft. Borrowers who pays more than the interest charge will reduce the principal. Overdraft uses current account facility. Borrowers can make pre-payment anytime. More flexible than the term loan but the interest rate is higher. Nowadays it’s more difficult to get banks to lend pure overdraft. It will be easier if there is a mixture between term loan and overdraft.
Flexi or flexible loans means it is a combination of term loan and overdraft. The borrower still needs to pay the minimum monthly instalment. Any extra payment will go towards reducing the principal and thus, in turn, will reduce the tenure year’s payable. Instead of putting your money in different accounts you can lump it in a flexi loan. Every time your money is in this account you will save on the interest. It functions as one account. The borrower need not give any notice for any extra payment, unlike the term loan. If there is any extra money in the account, the borrower can withdraw it anytime. Please be aware that once you withdraw, interest will be charged back. It uses the current account. Borrowers will be able to use ATM, cheques and also online banking for their transactions. It is a good package in which it can save a lot of interest if the borrower uses it to his/her advantage.
FIXED RATE LOANS
As the name suggests, it means interest rate is fixed for the whole tenure. Banks have this package under the Islamic loan. The interest rate is much higher than those conventional loans. Some insurance companies (not under Islamic product) also have a similar package but at a lower interest rate. Borrowers who are worried about escalating interest rate will go for this package. You do not have to worry about the interest rate.
Islamic loan uses the Murabahah concept under the Syariah principles. Under the Islamic concept of borrowing, the banks will buy the property from the borrower, then rent it back to them. The bank will determine the profit rate in advance after considering the tenure years.
Initially, the interest rate was fixed but as time evolved, the floating rate was introduced.
In recent years, there was a spike in Islamic loan applications, especially by property investors. Why is that so? In an Islamic loan, the banks cannot charge a penalty for early redemption. Property buyers with an objective of very short borrowing time frame will opt for this package.
Please take note to read the letter of offer from the bank before signing. In certain banks, they will have a special clause for this package. Make sure you understand the special terms before signing.
DISCLAIMER: The opinion stated in the article is solely of Miichael Yeoh and is not in any form an endorsement or recommendation by iProperty.com. Readers are encouraged to seek independent advice prior to making any investments.