Are you considering personal loan early settlement in Malaysia but wondering about the repercussions and benefits? You’re not alone.
In a financial landscape where flexibility and smart planning are key, understanding the nuances of personal loan early settlement can be a game-changer for your financial health.
In this comprehensive guide, we delve into the world of personal loans in Malaysia, unravelling what happens when you decide to pay off your loan before its due date.
Whether you’re aiming to reduce interest costs, improve your credit score, or simply want to be debt-free sooner, this article is your go-to resource.
When Should I Apply for a Personal Loan Early Settlement in Malaysia?
Applying for a personal loan early settlement can be a wise financial move, particularly if you are planning to:
1. Apply for a Mortgage
By settling your personal loan early, you significantly lower your overall debt burden.
This action can positively impact your credit scores, as recorded by Malaysian credit reporting agencies like CCRIS and CTOS, which enhance your mortgage eligibility.
Furthermore, clearing existing debts before applying for a mortgage is seen as a sign of financial responsibility.
This could translate into lower interest rates or a higher loan amount, making your journey to owning a home smoother and more affordable.
2. Free Up Financial Resources
Another advantage of personal loan early settlement in Malaysia is the financial freedom it offers.
By paying off your debts sooner, you save money that would otherwise be spent on interest payments.
This saving can contribute to other financial goals, such as growing your investments, achieving financial independence, or ensuring a stress-free retirement.
3. Lower Your Debt Service Ratio (DSR)
In Malaysia, having a high DSR can limit your chances of securing additional loans in the future, as it indicates a higher risk to banks.
However, by settling your personal loan early, you effectively reduce your monthly debt obligations.
As a result, banks are more likely to approve your loan applications and possibly offer better terms, as a lower DSR suggests a lower risk of default.
How to Calculate Personal Loan Early Settlement in Malaysia
Calculating the early settlement amount for a personal loan in Malaysia can be done using two different formulas: the Rule of 78 and the Concept of Ibra’.
Let’s break down each formula and provide examples to understand how they work:
1. Rule of 78
The Rule of 78 is more commonly used for conventional loans in Malaysia and is used to calculate the rebate on the interest payable when a loan is settled early.
(n-3) (n-2) x I/ N(N+1) = R
n= Number of monthly instalments over the unexpired period
N= Loan Tenure
R= Rebate (RM)
I= Interest payable for the whole loan tenure (RM)
The rebate of an 84-month loan (7 years) with a principal amount of RM50,000 and an interest rate of 10%, with the early settlement after 42 months, is provided below:
N = 84
n = 84 – 42
I = 50,000 x 10/100 x 7 = 35,000
R = (42-3)(42-2) / 84(84+1) /times 35,000 = RM7,647.06
2. Concept of Ibra’
The Concept of Ibra’, on the other hand, is specific to Islamic financing products and is used to calculate the rebate on the profit margin of a loan.
[n (n+1) / N (N+1)] x PM = Rebate
n = Remaining months to maturity
N = Total Tenure of Financing in Months
PM = Total Profit Margin
For an early settlement in 42 months:
Financing Amount: RM50,000
Outstanding Bank’s Sale Price: RM70,833.80
Tenure: 7 years (84 months)
Profit Rate: 10%
n = 84 – 42 = 42
N = 7 years (84 months)
PM = (RM50,000 X 10% X 7) : RM35,000
3. Rebate (Ibra’):
[42 (42 + 1) / 84 (84 + 1)] X RM35,000 = RM8,852.94
Total payable amount after Ibra’:
RM70,833.80 – RM8,852.94 = RM61,980.86
What Happens if You Choose Personal Loan Early Settlement
Here are several scenarios where an individual might need a loan guarantor in Malaysia:
1. Early Repayment Charges
When you decide to pay off your personal loan before the agreed term ends, you might be subject to early repayment charges.
This is a fee that your bank may impose for paying off your loan before the agreed term ends.
It’s essentially a way for the financial institution to compensate for the interest they lose due to the early repayment.
To get a clear picture of what you’ll owe, you need to request an early settlement figure from your financial institution, which should include:
- The amount paid to date.
- Your remaining loan balance.
- Any applicable interest charges.
- Potential fees for early repayment.
Once you receive this figure, there’s a 28-day window for you to decide whether or not to proceed with the early repayment.
If you choose to repay after these 28 days, however, be aware that you will need a new settlement figure.
Additionally, the ability to make partial overpayments varies based on your loan type, its origination date, and the specific terms of your agreement.
2. Your Credit Score
A common misconception is that paying off a loan in advance will always improve your credit score. However, this isn’t necessarily the case.
Closing a loan account early can lower the average length of your credit history, thus reducing the positive impact of having open and active accounts, which are beneficial for your credit score.
This is because, from a bank’s perspective, gradual repayment of debt over time is often seen as a more favourable indicator of good financial management.
It demonstrates a consistent and long-term ability to manage and meet financial obligations.
What to Consider Before Choosing Personal Loan Early Settlement
Before you proceed with a personal loan early settlement in Malaysia, there are several factors that you should evaluate to ensure that it aligns with your financial goals.
1. Assess Your Financial Readiness
It’s important to ensure that paying off your loan early won’t compromise your financial security.
Moreover, consider any upcoming expenses that may require substantial funds, as using your savings to settle the loan early could leave you financially stretched.
Another aspect to consider is the potential savings from paying less interest on your loan versus the benefits you might get from investing those funds elsewhere.
Sometimes, the opportunity cost of using your funds to settle a loan early may outweigh the benefits.
2. Engage with Your Financial Institution
Engaging with your financial institution is another critical step in this process.
For instance, you should inquire about the specifics of early loan settlement, including if there are any prepayment penalties or fees involved.
You can also ask for a detailed calculation from your bank showing any costs associated with early repayment versus the interest you would pay over the original loan term.
This will provide a clearer picture of the financial implications of your decision.
What’s more, it’s essential to discuss with your financial institution any possible impact on your credit score as a result of settling your loan early to avoid unintended consequences.
How Bluebricks Can Help with Personal Loan Early Settlement in Malaysia
In the complex financial landscape of Malaysia, managing loans and debts can be a daunting task for individuals and small businesses alike.
But not to worry, Bluebricks can help! A renowned bank loan and debt consolidation agency in Malaysia, we offer a variety of financial solutions, including:
- Personal loan services
- SME loan rejected services
- Mortgage loan rejected services (for buying a new home, refinancing and cashback purposes)
- Collateral loan services
Customisable Personal Loan Consultancy Services
We also take pride in our team of seasoned loan consultants adept at analysing and recommending the most suitable loan products.
These recommendations are based on a thorough understanding of your unique circumstances, such as:
- The specific loan amount you require.
- The urgency with which the loan amount is needed.
- Whether you or your parents own a property that has been held for over ten years.
- Your income level.
- Your CTOS score (such as your credit score and credit history).
Personal Loan Early Settlement – FAQs
In this comprehensive guide, we address the most frequently asked questions about personal loan early settlement in Malaysia.
Whether you’re wondering about the potential savings, the impact on your credit score, or the process involved, we’ve got you covered.
To apply for personal loan early settlement in Malaysia, you should:
Check your loan agreement or contact your financial institution to understand the terms and conditions for early settlement.
Calculate the amount you need to pay for the early settlement, including the outstanding balance, accrued interest, any early settlement fee, and possible rebates.
Inform your bank of your intention to settle your loan early and request a settlement letter that specifies the total amount due and the deadline for payment.
Yes, you can try applying for a new loan to streamline your personal loan early settlement process. However, you should consider the pros and cons of doing so.
Depending on the interest rates, fees, and terms of your new and old loans, you may end up paying more or less in the long run.
You should also check your credit score and debt-to-income ratio, as they may affect your eligibility and affordability for a new loan.
Personal loan early settlement fees in Malaysia vary according to the type of loan, the financial institution, and the terms and conditions of the loan agreement.
Generally, the early settlement fees are calculated as a percentage of the outstanding loan amount or the interest payable for the whole loan tenure.
The percentage may range from 0% to 5%, depending on how early you settle your loan and whether your loan is based on a flat rate or a reducing balance method.