Personal loan is a popular financing solution because it does not require any collateral, so borrowers have the freedom to use the funds for basically anything. Some of the common usage of personal loans are debt consolidation, loan restructuring, to purchase a vehicle, pay for medical expenses, and so on.
However, when some individuals are cash-strapped, they tend to be desperate and overlook certain important aspects when applying for a personal loan. If you are planning to apply for a personal loan and you’ve heard stories about individuals being scammed or end up paying super high interest rates, don’t worry, in this article we would cover the few common mistakes that borrowers make when applying for a personal loan.
1. Borrowing more than you actually need
Although you may be eligible for personal loan with a high loan amount, but that does not mean that you should borrow more than you actually need. A higher loan amount would translate into a higher repayment meaning in the long run you would end up paying more interest.
Same goes to applying for a personal loan when you don’t really need one. You will only hurt your credit score when you struggle to pay on time or pay more interest rate. Ensure that you have a clear purpose or intention that you require a financing facility, then you may apply for a loan.
2. Being ignorant about your credit score
When banks process your application, they usually take consideration of your credit score. Depending on your credit score, it describes your repayment behaviour; whether you are paying your bills promptly or not. As stated by CTOS, the benchmark for a good credit score is anything above 697.
So, try to find out what your credit score is and maintain it above 697. If you have outstanding debts like credit card, pay up first before applying for a personal loan. Your credit score is important as it would determine whether your loan would be approved or not, the approved loan amount and also the interest rate that you will be getting.
There are other legal alternative financing sources such as licensed money lenders or cooperatives (koperasi) where they will accept a lower credit score. For personal loan by licensed money lender, this comes with higher interest rate whereby for koperasi loan, the repayment is done through salary deduction and is only applicable to civil servant. As a legal lender, they will perform the necessary diligence to check on your capability to repay the loan and your credit record.
Read more about what is CCRIS & CTOS and also how to read your CCRIS report.
3. Borrowing from unlicensed or illegal money lending
During times of desperation, individuals that are in need of huge sum of money might seek help from unlicensed money lending agents. Why? Well because compared to other financial institutions, unlicensed money lenders can provide quick cash. When an individual is desperate, usually the case is that they don’t investigate the background of the moneylender itself. Plus, they will also be attracted by the quick loan approval timeline. Some of them tend to also be ignorant about the high interest rates and hidden terms that are included in the offer.
These money lending that are not governed by the Ministry of Housing and Local Government (KPKT) can do anything to their clients just to collect their debt, to the extent of harassing the borrower’s family and resorting to violence. Licensed moneylenders that complies with the Moneylenders Act 1951, have to abide with strict laws in order to their continue operations. For example, licensed moneylenders have to renew their license every 2 years, offer interest rate of maximum 12% p.a. (for secured loans) and 18% p.a. (for unsecured loans).
To prevent and protect yourself from dealing with an unlicensed moneylender, here are some tips that you can use:
- Check the company’s background status via the KPKT website or contact their phone line 03-8000 8000.
- Check if the license issued at their office is by KPKT but not Bank Negara Malaysia.
- Check if the application requires standard loan documentation (IC copy, salary slip, bank statement, EPF, etc).
- Check the offered interest rate if it falls within the required amount (maximum 12% p.a. for secured loans & 18% p.a. for unsecured loans), the loan agreement is validated by a third party i.e. lawyer, legal officer, commissioner for oaths.
For more information about licensed moneylenders, read our article as we compare between licensed moneylender with loan sharks (ah long).
4. Using your name as a borrower
Believe it or not, this situation happens a lot in Malaysia. Individuals who used their name as a borrower are often sold out by their good friends, and even by their own family members. The sad truth is innocent borrowers are forced to bear the huge amount of loan and losses on their own because the people that they trust are not paying up their bills. At the end of the day, they are the ones declared bankrupt. Even some of our local celebrities are victims of this.
It is always good to help a friend or family member, but when it comes to finances it is best to stay extra cautious about this. Well, it is definitely not worth it to risk helping and end up with a bankrupt status. As a precaution, do not use your name as a borrower on behalf of another individual, no matter how close they are with you. If you are unable to do so, always monitor this individual’s repayment records so that it does not bring any problems for yourself. Legal actions can be taken against you which can cause all sorts of difficulties in the future.
5. Blindly becoming a guarantor
Certain types of bank loans require guarantors as a prerequisite for loan approval. Usually, a relative or close friend might ask you to act as their loan guarantor. While it is not wrong for you to be a guarantor, make sure that you perform a background check on the borrower’s financial management and his ability to commit to monthly repayments. This is very crucial in protecting yourself from unwanted circumstances in future!
It is common to catch guarantors unaware of the fact that they are also liable for legal actions if the guaranteed borrower has problems with their repayment. This has caused many guarantors declared as bankrupt or blacklisted and ended up unable to apply loans for themselves.
It is important to know that as a guarantor, you are responsible in guaranteeing that the borrower will service their loans well. If not, you will be liable for legal actions by the court. Make sure that you examine the content of the loan agreement and its consequences first. Before agreeing to be someone’s guarantor, here are 5 things to watch out for while acting as a loan guarantor.
6. Not examining & understanding the terms of financing being offered
We know it can be an exhaustive process going through the loan application or even agreement. Sometimes, you might even overlook some of the details in your loan agreement. As a borrower, it is important for you to pay attention to some of the important details of the loan. For example, these are some of the questions that you should know – what is the interest rate, how are you going to pay the loan or what is the method of repayment, what is the loan tenure, are there any late payment charges.
It is important for you to know and understand some of these terms to avoid any disagreements in the future. Afterall the worst thing that could happen is to be tied down to a personal loan for 10 years and you are unhappy about the high interest rate. So, don’t settle too easily. Always compare and get the best deals!
Here we compiled 8 things for you to check before signing a personal loan agreement.
Better safe than sorry
Require extra financing in a safe & affordable manner?
Hop on to Direct Lending – an online lending platform that helps you to search, compare and apply financing that most suit you in a safe & affordable manner. We provide free eligibility checking. Even if you don’t apply a loan with us right away, we won’t charge anything. Get the best deals with us today!