Tag: Personal Finance

  • A Beginner’s Guide to Personal Loans

    A Beginner’s Guide to Personal Loans

    A Beginner’s Guide to Personal Loans

    Introduction

    Loans can be defined as ‘an amount of money that is borrowed—often from a bank and has to be paid back, usually together with an extra amount of money that you have to pay as a charge of borrowing’ as per the Cambridge Dictionary. People take up loans for various reasons but ultimately it is because they don’t have sufficient cash in hand readily available to procure something. Hence, applying for loans is usually the only solution for them to get the money for the time being. It is very common these days for people of all types of ages to take up loans, even minors. Unless you stand to inherit tonnes of money from your family’s wealth, you’re likely to take up a loan in the future. There are myriad types of loans offered, each serving different purposes, but this article will explore the commonly-known—personal loan.

    Types of Personal Loans 

    Image 1: Difference between Secured and Unsecured Loan
    Source : The Balance

    Image 1: Difference between Secured and Unsecured Loan

                       

    Generally, a personal loan refers to money borrowed to be used for a variety of reasons such as repaying debt, medical bills (also applicable for insured people), contingency spending and many more. The loan’s principal plus interest is to be repaid on a regular basis (usually on a monthly basis). It is usually offered by approved financial institutions such as (banks, online lenders and credit union) and other unapproved institutions. These loans are different from other types of loan (such as car loans or student loan) as the former serves many purposes and the latter is strictly for specific purposes. 

    The consensus is that there are two types of personal loans—secured and unsecured. A secured loan requires collateral as part of the contractual agreement. For instance, if the borrower is unable to repay the loan, also known as ‘default’, the lender may retrieve the collateral upon defaulting the contract. Collateral could be in any form as long as they hold monetary value such as physical assets or savings accounts. On the other hand, unsecured loans require no collateral, and because of that, unsecured loans have a higher interest rate compared to secured loans. As you can see, there is no best of both worlds’ situation. It is either you are at risk of losing your collateral in the event of defaulting or you pay a higher interest rate.

    What To Consider Before Opting For a Personal Loan? 

    As mentioned above, it has become a norm in every part of the world to take up personal loans. However, please do not succumb to peer pressure and ask yourself these few questions before taking up a personal loan.

    • What’s the Intention?

    Taking up a loan comes with great responsibility because of the repayment terms and interest rate, which could be overwhelming to you. I am not in the position to judge one’s motive of taking up a loan, but it is rather unwise to burden yourself by taking up a loan to buy ‘wants’ just for the sake of aesthetic values such as clothing or gadgets. Personal loans are usually taken up for important financial situations such as hospitalization or education.

    • How’s your relationship with Banks?

    In life, if you do something good, then you will get favour in return. The same concept can be applied with banks. If you maintain your relationship with your bank and keep on using their services. Then the bank may offer you a personal loan that is more favourable to you compared to other clients, such as giving a lower interest rate.

    • Credit score

    Credit score or known as CTOS score is used to represent the creditworthiness of an individual. It ranges from 300-850. The higher the score, the more favourable it is for lenders to lend to you, and this means more affordable rates can be offered to you. There are also loans offered to people with bad credit scores. These bad credit lenders may be willing to lend you money but with a higher interest rate.

    • Interest rate

    In hindsight, people will opt for the low-interest rate loan as it is perceived as a good deal, but that is not always the case. It can mean a longer period of repayment. So it is crucial to scrutinize which loan you are going to take. Banks usually will advertise its interest rate in nominal value, but you should always ask for the effective interest rate as compounding can incur within those periods. Hence, a compounding interest rate gives you a more accurate rate. For example, a nominal interest rate of 10% per annum if compounded quarterly will give you an effective interest rate of 10.38% per annum. 

    The formula for calculating Annual Percentage Rate are as below;

    (where r is nominal rate and n is number of compounding period in a year)

    For semi annual compounding frequency, it should be:

    So here I reiterate that you should take a good look at the effective interest rate before deciding.

    Alternatives for Borrowing 

    With that being said, there are few alternatives to a personal loan that should be considered. Remember, always keep your options open, especially when the decision is related to finance. 

    Credit Cards 

    The most common one would be credit cards. It’s very common these days for people to swipe up their credit card because it’s easily accessible but such use is capped by individual credit limits. Each bank who issues credit cards offers different types of benefits so do some research on each before applying for the card. Its downside is the hefty interest rate, and it causes a lot of bankruptcy among Malaysians including youths. So do bear this in mind before using one. One also might opt for overdraft facilities, also known as a cash line facility. 

    Overdraft Facilities 

    Overdraft facility is a type of demand loan which is offered by banks to enable a person to withdraw more money than they have in their account, and the bank determines the cap. How much you will receive from the bank is dependent on the bank’s own calculation. Though, it is very normal for businesses to opt for overdraft banks to float their cash flows. Same as a credit card, overdraft facility has a high interest rate, and there’s a commitment fee of 1% at the end of each month. 

    Licensed Money Lenders

    Licensed Money Lenders are a type of business where they lend money to clients who pay interest. They are different from standard conventional banks because they only charge an interest rate of 12% per annum for secured loans and 18% annually for unsecured loans. It has become not unorthodox for people to borrow from them nowadays. Some might have negative connotations about them, but they might not know that these lenders are governed by the Ministry of Housing & Local Government under the Money Lenders Act 1951, which differentiates them from loan sharks. Most borrowers resort to this option because they offer attractive financing terms and faster fund disbursement. They are much lenient in accepting loan applicants compared to banks, and borrowers can choose from a myriad of loan packages. With that being said, the money lent comes with high interest.

    Source : Easyloan2u

     Image 2 : List of repayment schemes offered by a licensed money lender

                                                            

    PTPTN

    Honourable mention would be Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN). PTPTN is a government institution that offers loans for Malaysian students who are pursuing tertiary education. Specific requirements such as must have received offers to study at higher education institutions and the course you are pursuing are approved and accredited by MQA  need to be fulfilled before they qualify to apply for PTPTN. but once it’s approved, I kid you not, thousands if not tens of thousands of youths will be jubilant. PTPTN are generous in giving out loans. The amount of loan given depends on household income, courses applicants are pursuing and type of education institution (public or private institutions). Applicants may receive as low as RM2850 and as high as RM50,000. 

    Students are free to use the money in any manner they choose to, but often end up being defaulted for spending more than they can repay. As at May 2019, around 356000 people or equivalent to 16% of defaulters have never paid their loan instalment once. Hence the proverb “do not bite off more than you can chew” is an apt observation of the issue. It is essential that students know there is an interest rate of 1% for the PTPTN loan (or they called it as Ujrah), the loan given needs to be repaid starting after 12 months of graduating and eligible borrowers need to maintain a GPA of 2.0. Severe repercussions such as being blacklisted by Central Credit Reference Information System (CCRIS) could be faced if one defaults.

    Conclusion 

    There is no harm in taking out a personal loan, provided you have good insight of your financial standings and understand its repercussions. You may be in a rush to take out the loan, but it is best practice (not particularly about loan) to compare with other options to get the best deal. “Me, myself and I” are the only relevant individuals who can determine which loans are the best and most suitable choices for an individual (unless you have a personal financial consultant hidden up your sleeve). Whatever you do, do not succumb to peer pressure and have a clear conscience before choosing loans and always practice spending within your means. 


    Researcher: Emil Zaydan

    Reviewer: Millen Lau

    Editor: Arivaasaran Arjunan

    Download Article: [download id=”5516″]


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  • Alternative path for homeownership: An opportunity or a threat?

    Alternative path for homeownership: An opportunity or a threat?

    Introduction

    For most people, owning a house is an ultimate dream and a major milestone in life. However, there are many challenges that come along in the journey of purchasing a first home. 

     

    Firstly, high housing price is always the main obstacle to owning a house. According to a Department of Statistics Malaysia’s (DOSM’s) survey, the median monthly income in the country was RM5,873 in 2019 and the price ceiling for affordable housing was about RM211,428 under the Median Multiple approach which claimed affordable housing price should be three times or less than the median household incomes. However, the average price for newly launched houses in the country was RM417,262. 

     

    Secondly, a reason why potential homebuyers fail to achieve their dream might also be due to loan rejection. PropertyGuru’s Consumer Sentiment Survey H2 2018 revealed that 56% of Malaysian respondents experienced a tough approval process for housing loan applications – reasons for which include applicants having too many existing loans, unstable salary and bad credit history. These prevalent homeownership issues have set the stage for the new concept of property funding to appear – Crowdfunding. This article aims to discuss the feasibility and sustainability of FundMyHome, a homeownership platform launched under the Property Crowdfunding Scheme, which aims to assist first-time homebuyers infunding their first house-purchase. 

     

    FundMyHome 

    Background  

    To address these homeownership issues, the Malaysian government decided to join this new fundraising trend by launching a property crowdfunding scheme in Budget 2019. The scheme was designed to help fund the first-house purchase of those who are unable to afford the high price of housing and those who fail to qualify for conventional housing loans. In September 2019, the first license of Recognised Market Operator for a property crowdfunding platform was issued to EdgeProp Sdn Bhd. The first property crowdfunding platform in Malaysia called FundMyHome, is specifically tailored to first-time homebuyers. Joining the scheme does require that applicants meet a few criteria: The prospective homebuyer has to be Malaysian, at least 21 years old, no prior ownership of any property and no bankruptcy record.  

     

    FundMyHome is quite similar but its business operations do not wholly apply the crowdfunding concept. It is understood that crowdfunding refers to fundraising conducted by asking small amounts of money from a large number of people, while the funds for this platform are fully raised from institutional investors such as banks. 

     

    How does this platform work? 

    Under this platform, homebuyers are only required to pay 20% upfront of the purchase price while the remaining 80% will be paid by institutional investors. During the five years tenure period, the homebuyer is required to stay in the property, but renting rooms out is permitted. After five years, the homebuyer has to decide on whether to keep the property or to sell it. If the homebuyers decide to keep the property, he has to buy up the entire property via home loan or refinancing after five years. On the other hand, a homebuyer who agrees to selling the property will share the profits or losses of the property based on the difference between market price and initial purchase price.

     

    Other Property Funding Method 

    Conventional Mortgage Loan 

    A Conventional Mortgage Loan is the most common funding option for people to purchase a house that is not insured by the government. In Malaysia, conventional home loans can be divided into 3 broad categories, including term loans, semi-flexi loans and flexi loans. The borrowers are also given two types of interest rate package to choose which are fixed interest rate and variable interest rate. For loans with fixed interest rate, its interest rate will be fixed throughout the loan while the variable interest rate is tied to the base rate (BR). The borrowers need to determine which loan product matches their objectives and purchasing needs.  

     

    Government Initiatives 

    The Malaysian government has provided a bundle of homeownership programmes with different targeted groups. 

     

    • My First Home Scheme

    This scheme was first announced in 2011 and is administered by Bank Negara Malaysia. It allows first-time homebuyers to obtain 100% financing from recognised banks and financial institutions, enabling them to purchase their first house without paying the 10% down payment. Recently, Digital SPR has been announced, aiming to provide an integrated platform which connects home buyers, bankers, developers and real estate agents. 

     

    • MyDeposit Scheme / First Home Deposit Funding Scheme 

    MyDeposit Scheme was first announced in Budget 2016, aiming to help the lower-and middle-income group, with a household income up to RM10,000, in purchasing their first house. An eligible first-time homebuyer will be provided a once-off contribution to 10% down payment or a maximum payment of RM30,000. The property is not allowed to be sold for a period of 10 years and renting out the house is prohibited. 

     

    • BSN Youth Housing Scheme 

    The scheme which is administered by Bank Simpanan Nasional (BSN) offers up to 100% loan to single or married youths to own their first home. In addition, the eligible youths (aged 21-45) will be able to enjoy 100% stamp duty exemption up to RM300,000 and monthly financial assistance of RM200 for the first two years. 

     

    Comparison between FundMyHome and Other Property Funding Method 

    • Entry requirement 

    For the homebuyers to qualify for a conventional house loan, they have to meet a list of tight conditions which reflect their “financial health” for the banks to ensure they can afford the monthly payment. A credit score is one of the ways to check for financial health. Through the tight requirement, the banks and other financial institutions are more secure from facing the loss of bad debt. In order to help those who are unqualified for conventional house loans, some government initiatives are built with ease of eligibility criteria and financial requirement.   

    For FundMyHome, the entry requirements are even lower as the government only provides the platform without providing any monetary assistance for the homebuyers. To assist the first time homebuyers to step in the property market easier, the government has lowered the entry barriers where the homebuyers can purchase a house by only paying 20% of the purchasing price for the five years tenure period.  

     

    • Ownership 

    For conventional mortgage and government homeownership initiatives, the homebuyers will legally own 100% of the property once they buy it and repay the home loan gradually. However, under FundMyHome, the homebuyers will have to share the ownership with the institutional investors according to the payment ratios. The full ownership of the property will only be entitled to them if they pay fully for the property after the initial five-year period.   

     

    • Home equity 

    Home equity refers to the amount of ownership over a property in which the homebuyers have legal interest. In simple words, it tells you how much you own the property. Under normal mortgage and government initiatives that provide loans, the home equity of the homebuyers increases over time since their payment on principal also increases. To illustrate, a person buys a house that costs RM500,000 and pays RM80,000 as downpayments which means his bank loan is RM420,000. In this case, he will have 16% of home equity over the property initially. After five years, if he had paid RM100,000 of the loan, the bank’s equity in his house decreased by RM100,000 while his home equity increased by the same amount.    

    However, the home equity of the property bought under FundMyHome will remain 20:80 throughout the tenure period. It will only change when the homebuyers make a decision on keeping or selling the property after five years.   

     

    • Risk Exposure

    Most of the government homeownership programmes have prohibited the homeowners from conducting any selling activities for a specific timeframe such as 10 years for MyDeposit programme. Therefore, the volatility of the property’s market price does not affect the homebuyers much. 

    However, the homeowners who purchase a house under FundMyHome are exposed to more uncertainties. Firstly, if the property price declines by up to 20%, the buyer will also lose the initial capital of up to 20% after the five years tenure period. Therefore, they might suffer a loss on the selling of the property and as well as if they decide to buy the full ownership of the property. However, it is a double-edged sword as they might also be able to gain money if the price of housing rises. In addition, if the homeowners are also exposed to refinancing risk and they intend to buy the entire property via home loan after the tenure period ends as the interest rate for the home loans might be higher after five years.             

     

    Sustainability in the Long Run and Short Run 

    Undoubtedly, by filling up the financial gap, this homeownership platform might help the potential homebuyers to purchase their first house easier since the initial capital required is lower, especially for those who do not qualify for conventional housing from financial institutions. However, it probably raises more problems. With a lower entry requirement, this scheme may attract more people to enter the property market hastily, including those without good financial stability by raising the default risk of the homebuyers. 

     

    After the five year of the tenure period, many homebuyers probably realise that they are not ready to take on the financial responsibility of homeownership and decide to sell the property. A vigorous cycle will be created where the property overhang issues will be raised again.  

     

    In addition, given that the housing price drops after five years, they will be worse off as they are responsible to absorb the first 20% loss. Although it also provides an opportunity for them to gain from the appreciation in housing price, a first-time homebuyer without strong financial ability should avoid themselves from this kind of speculative risk. 

     

    Conclusion 

    With a concept similar to Crowdfunding, FundMyHome is a new innovative path to homeownership. However, the existing framework for the property market might need to restructured and improved in order to provide a more long-term solution for homeownership issues. It might become a threat to the stability of the market, by agitating potential first-time homebuyers who are ill-prepared to take on the financial responsibility of owning a house. Therefore, a rational homebuyer should be well-aware and cognizant of the potential risks such a decision might entail. The first step we recommend, is a sound and unbiased assessment of their financial health before thinking about taking up this scheme.

     


    Researcher: Evon Chew

    Reviewers: Yang Ler Lee, Millen Lau

    Editors: Arivaasaran Arjunan, Stella Teoh

    Download Article: [download id=”4955″]


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