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9 facts about personal loans in M’sia you should know to borrow responsibly in a pandemic

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[This is sponsored content with Citibank.]

Let’s be real, personal loans don’t always have the best rep.

Seeing how easy it is to access them, it’s no surprise that some may jump into this commitment for fast cash due to misconceptions about how they work.

At the same time, in this current economic climate, personal loans may be a viable option to consider under the right circumstances. Here’s a breakdown of key information you should know about them.

What are personal loans?

In short, personal loans are sums of money you can borrow for a variety of reasons, and they’re offered by banks, credit unions, or online lenders. 

There are two types of personal loans—secured and unsecured. A collateral is needed for secured ones whereas unsecured loans don’t require a collateral. 

Dictionary time: Collaterals are assets that lenders accept as a security for the loan, and they could be a car, a house, stocks, jewellery, collectibles, future paychecks, etc.

Some common reasons why people take out personal loans are for medical issues, debt consolidation, renovation or home improvement costs, weddings, and education.

According to the team at Citibank, the majority of their customers apply for personal loans due to emergency situations and the need for cash. Other than that though, there are borrowers who’ve taken out personal loans for renovation, education, etc. 

Advantages of personal loans

1. Help structure and plan your budget & finances

Personal loans have a flexible tenure that comes with fixed installments, which is helpful for the borrower to map their payment timeline out. 

For Citi Personal Loans, you can choose from 24, 36, 48, or 60 months as a repayment tenure, but do note that the longer the tenure, the more interest would need to pay across the lifetime of the loan.. 

There is a common misconception that having a personal loan can negatively impact your credit score. However, if you are able to follow a consistent payment plan, this will not be an issue. 

2. Can be used for almost anything

Out of all types of loans, personal loans are arguably the most flexible in terms of what you can use it for. It’s not tied to one type of commitment you’re paying for unlike auto loans, mortgage loans, student loans, and the like. 

The general rule of thumb is to never take out a personal loan if you don’t have a solid plan for repayment, and think of how your expected income would correspond to your payment timeline. 

3. Allow debt consolidation and saving on interest

Because you can use personal loans for almost anything, some people consolidate all their debt and use a personal loan to pay off all their collective debt at a go. That way, you only have one monthly payment to keep track of instead of multiple payments to different creditors. 

Additionally, personal loans could save you money if it has a lower interest rate than the other debts you were tied to, especially credit cards. This means that you can potentially lower the amount you pay for monthly installments too.

Citi Personal Loans have competitive rates that range from 5.33% to 9.80% p.a. A quick search of other options revealed rates that went from 3.99% to over 18%, so make sure you do the appropriate due diligence before committing to one. For starters, you should be clear on the T&Cs, if the rate is applicable to a certain tenure or loan amount, and also take note of any fees applicable.

4. Access to fast cash without collateral involved

As mentioned, personal loans come in handy in times of emergencies where one may not have an emergency fund or insurance to cover unexpected expenses like medical bills. 

However, with great power comes great responsibility, and borrowers are discouraged to use personal loans for luxuries or non-essential purchases, even if you have a dire need for a vacation (once we can travel safely). 

Personal loans generally have quick approvals, and in Citibank’s case, it has conditional instant approval as well. Citibank’s personal loans are also unsecured, hence there’s no collateral involved. Since there’s no collateral or guarantor, you don’t have to risk losing valuable assets like your car or home. However, the penalty for late payment would be 1% p.a. on the past due amount

Example: Alif took out a loan amount of RM10,000 and has a monthly repayment of RM1,000. If he’s 11 days late on his first scheduled payment, he has to pay an additional RM0.30, which is his late fee.  This is calculated by taking 1% of his payment owed, dividing it by 365 and multiplying it by 11, which is the number of days he is late by.

To apply, your loan will need to be a minimum of RM5K, and ‘new-to-bank’ customers can get up to RM120K whereas existing customers can borrow up to RM150K. 

Citibank requires a minimum income of RM4,000 per month or RM48,000 per annum to qualify as an applicant, salaried or self-employed. If you’re self-employed, your business must be established for at least 2 years and applicants must be between ages 21 to 60 by the time of their loan maturity, and are citizens or PRs working in Malaysia. 

Disadvantages of personal loans

1. Can lead to potential credit score damage

In terms of credit score, personal loans could be a double-edged sword. If you aren’t good at making consistent payments, taking out a personal loan could damage your credit score

Hence it’s important to reflect on whether your payment history in the past has had a pattern of regular late payments or nonpayments. 

It’s also important to remember that if you take a personal loan and make multiple late payments, your damaged credit score could reduce your borrowing power for other lines of credit in the future or even applying for another financial product. 

2. Increased debt due to poor financial discipline and literacy

Another double-edged sword in personal loans is that it requires for you to have good financial discipline with monthly payments; if you’re a bad paymaster, this type of loan could lead to unnecessary debt.

Moreover, while consolidating all your debt into one is a more efficient way to manage your finances, it’s crucial you check if the interest rates are actually lower than if you paid to multiple creditors. Otherwise, you’ll find yourself ending up paying more interest in the long run. 

That being said, one should keep in mind not to take out personal loans for luxuries that you can’t pay for with what you have already. At the end of the day, it’s no fun getting into debt just to enjoy yourself.

3. Potentially has heavy financial penalties or legal ramifications

Now the downside of not having any collateral involved is you can’t exchange your car or house with the lender if you’re having trouble fulfilling your payments. 

First, your interest rates will continue compounding. Some banks in Malaysia can also increase your interest rates to make you take your repayments more seriously. 

Worse comes to worst, your creditors can file bankruptcy against you, and you could lose your assets as well as your right to leave the country. Additionally, you could be sued in which the bank can garnish your wages, place a lien on your property, and freeze all or part of your money in the bank. 

4. Includes an early settlement fee

Because you’ll be charged if you settle your debts earlier, you’ll need to be financially disciplined and properly plan out your budget for at least the next two years (if you choose the shortest tenure period). 

If you do want to repay the full outstanding amount ahead of time, you should be prepared to cover the cost of the early settlement fee. These details and more will be part of the terms and conditions, which you should be familiar with before signing up for any loan plan.

On the fence: Comes with fixed payments 

We can’t classify this as a direct advantage or disadvantage, because it is dependent on your circumstances and spending habits. 

Essentially, personal loans are suitable for customers who want to get a one lump sum and have a clear visibility on how much they can afford to pay back monthly. If you do not fall into this category, personal loans may not be the best solution for you.

Looking at alternatives: If you’re looking for credit cards to make payments on your purchases, Citibank is currently offering a Citi Cash Back Card, whereby users can earn up to 10% cashback on Grab, groceries, dining, and petrol when you meet the minimum monthly spending. 

Besides that, there are also Citi Rewards points at Taobao, Lazada, Amazon, major supermarkets and departmental stores under their Citi Rewards Cards.

New Citi credit cardmembers interested in signing up are entitled to RM500  Touch ‘n Go eWallet credit as well. The campaign is valid till 31 Aug’21. 

Last words of advice

The main takeaway is to ensure that you’re applying for a personal loan with a solid payment plan, and that you’re not taking out this loan for non-essential or non-emergency reasons like luxuries or vacations. Being careful with your money and debt is something everyone should consider more seriously now more than ever. 

  • You can learn more about Citi Personal Loans here.
  • Disclaimer: The content above is based on the writer’s opinion and research. Before making any key financial decisions, please ensure that you perform the necessary due diligence.

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