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Islamic Banking: A Guide to Personal Loans in Malaysia: What to Look Out For

By Eugene Chua Save Money


So you’re thinking about taking out a Personal Loan, but not sure if you should, or what to look out for? Well look no further for answers as this guide endeavours to answer all your questions and more!

When you are taking out a loan, there are definitely a lot of things to look out for; among them are interest rates, additional or penalty charges, and guarantors. We’ve explained how Flat Interest Rates affect you, now we’ll continue with early repayment penalties.

Early Repayment Penalty (or Rebate, but just a different way to look at it)

Reducing your overall debt level may be on the forefront of your mind. Hence, you may think that it’s a great idea to pay back your personal loan before the end of its tenure, should you have spare funds available. However, you need to be aware that some loans may have early payment charges. This occurs because the loan providers make their profits by charging interest on your loan. If you clear it early, the lender would not get as much interest as they would have had if you held the loan to the full tenure. Therefore to make sure that the loan arrangement is still profitable even if early repayment occurs, the lenders will include an early repayment penalty into the loan agreement. Be sure to look carefully at the terms and conditions of the loan agreement to check the rate charged on the early settlement. For example, some banks charge a 3.0% early repayment penalty on the outstanding sum, subject to a minimum of RM300 for the notice period in lieu of 1 month’s written notice. Other banks might offer lower rates, so be sure to do some research.

In the conventional banking system, consumers only have to pay the outstanding principal amount and interest at the point of early settlement (in addition to the early settlement penalty). However, consumers under the Islamic banking system have to settle the total outstanding selling price in the case of early settlement. The consumers are also provided a rebate to maintain the competitiveness of Islamic banking. This concept, accepted in Syariah principle, is called ibra’. For clarification on the difference between penalty and rebate, have a look at the example below:

Amira borrows RM10,000 from ABC Bank with a 5-year tenure and 10% p.a. interest rate. At the end of the tenure, Amira should have repaid RM15, 000 with the interest charges. However, she wants to pay it back at the end of year 3. The bank applies an early settlement penalty of 3% on the outstanding sum. Amira has already paid RM4,000 of her principal amount and RM2,000 in interest charges. So, at year 3, Amira only needs to pay RM6,000 of the remaining principal amount plus 3% on the outstanding amount.

If Amira borrows the same amount from CBA Bank with same interest rate, but instead of an early settlement penalty, she gets a rebate @ ibra’. Amira should pay in full RM9,000 at year 3 if she wishes to have early settlement. However, the bank will offer a rebate as calculated in the formula below:

Ibra’ = {n (n + 1)/ T (T + 1)} x P, where

n=number of monthly instalments remaining,
T=Financing tenure, in months
and P=Interest payable over the entire financing tenure

So Amira will receive rebate of RM1,819.67, so she actually have to pay RM7180.33 only at year 3.

*Eugene Chua is the Finance Editor of SaveMoney.my, an online consumer advice portal which aims to help Malaysians save money through smart (and most of the time painless) savings in their daily banking, technology, and lifestyle spending habits.

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