Personal Loan Application Guide

Personal loans in Malaysia have a wide range of uses. Whether you are starting a business, buying a car, or looking to consolidate your credit card debt, a personal loan could be just the financial product that suits your needs. Although there are many ways to obtain personal loans, it is a good idea to have a basic understanding of the application process as well as know how to choose a personal loan that matches your requirements.

In this guide, we will go over each stage of the application process and show you how you can prevent your loan application from getting rejected. We also provide you with the step-by-step list you can use to make sure you pick the right personal loan.

Picking the right personal loan

There is no single best personal loan in Malaysia for everyone. What is considered the “best” will vary from person to person because not everyone can get the same loans and some loans are better than others, depending on your situation.

Why do you want a personal loan?

Personal loans in Malaysia are used for a variety of different reasons. Before you start your application process, it should be clear to you how much you want to borrow, what you are planning to use the money for and how you plan to pay it back.

• Personal Loan For Debt Consolidation

The reason why you are getting the loan plays a role in the application process because it tells banks how you deal with money. If you are up to you ears in debt and are trying to get a personal loan for a 10-day holiday, the bank is not likely to approve your application, simply because your behavior signals bad money habits

1.Are you eligible for a personal loan?

• Age – To qualify for a personal loan in Malaysia, you need to be over 21 years old, but not older than 60. For some loans the requirements are even tighter, requiring people to be under 55 or 50.

• Income – In order to be eligible for a personal loan, you need a level of income that ensures the bank that you will be capable of services the loan requirements. Most personal loans in Malaysia require you to have an income of at least RM 1,000, although RM 2,000 – to RM 3,000 is more common. Of course, the higher your income, the better. If you do have an exceptionally high income, you might qualify for a select few low-interest rate loans, only available to top earners.

• Residency Status – In order to qualify for a personal loan, you will need to be a Malaysia citizen or have Permanent Resident (PR) status.

• Credit Score - Before your loan application is approved, a thorough credit check is done to make sure that you are able to repay your loan. A poor credit history could lead to higher interest rates or loan rejection. You should always maintain a good credit history.

• Debt Service Ratio - If you have ever applied for acar loan, home or personal loan, you will probably have heard the phrase ‘debt service ratio’ (DSR) from the bank’s loan officers whilst they explain to you how the loan works. The debt service ratio is one of the key factors that the bank will evaluate while performing their due diligence during the loan approval process.The DSR is calculated based on the total of all your monthly debt obligations - often called recurring debt / commitment, which includes your total loan on mortgage, car loans, personal loans, your minimum monthly payments on any credit card debts, your other loans, together with the monthly commitment for the current application, divided by your net income - after the deduction of income tax / KWSP/ SOSCO (where applicable).

Read more: How do I calculate my debt service ratio?

• Employment status – Depending on your employment status, you may be ineligible or will have additional requirements in order to apply for a personal loan. For example, fresh graduates will need to have at least 6 months’ pay slip to apply for a personal loan, if not some banks will require a guarantor.

There are also other factors like your CCRIS and CTOS reports that help the banks assess your credit-worthiness and ensure that they do not issue out a bad loan. However, in this article, we will be focusing on the debt service ratio and how it affects your chances of getting a loan.

2. How much can you borrow?

As a general rule, banks will offer a loan amount of not more than 30% of your current financial commitments. For personal loans, banks will usually offer between 2 to 3 times your monthly salaries. Calculate your financial commitments before you make the application and see if you can really afford to take up a loan. Some people may also forget to look at the loan’s requirements such as the amount of minimum salary required.

3. Points of interest

• Flat Interest Rate vs. Effective Interest Rate – Most banks will quote you the flat interest rate (FIR) on the loan. FIR does not take into account compounding interest and can, therefore, be misleading if you have a longer-term loan where compound effects start to play a role. The interest rate that you have to look at in this case is the Effective Interest Rate (EIR) which does take into account compounding and allows you to compare personal loans to find the best offer. You don’t have to calculate EIR yourself, we have the EIR quoted with all our personal loan listings
• Extra fees and charges - It’s important to check what the additional fees and charges are that the lender imposes. The most common fees are:
• annual fees
• handling and administrative fees
• repayment charges
• late payment fees

Because Malaysia’s market is highly competitive, some lenders waive off certain charges completely, such as the annual fees.

What do you need to know to compare and get the best personal loans for yourself?

There are several key factors you need to consider in terms of comparing personal loans. These include:

• Effective interest rate (EIR)

The EIR is the amount of interest you are really paying after factoring in the compounding effect of adding your owed interest to the total amount due.

For example, if you have an option to either pay with your credit card or take out a personal loan to make a certain purchase, you could use the EIR to pit the credit card’s per annum interest rate against the personal loan’s effective interest rate to accurately estimate which would help you save more.

Thankfully, you can clearly find out the EIR for all personal loans on CompareHero.my comparison pages without having to do the calculation on your own. The Flat Interest Rate for personal loans in Malaysia ranges between 4.99% to 24%, while the EIR for personal loans in Malaysia ranges between 9.29% to 39.43%.

However, the interest rate imposed by bank still depends on the amount of loan applied, your credit score, income level and collateral involved in the application for a personal loan. This is why credit score plays an important role because a person with healthy credit score can usually get better interest rates.

• Income requirements

To apply for a personal loan, the minimum income for the applicant is RM1,000 (Bank Rakyat Personal Financing-I Private). It is also safe to say applicants with a higher monthly income will have a higher chance of getting lower interest rates on their personal loan offers.  Different products from different banks require different income levels too.

• Credit score

Basically, you can find your credit score from three main credit rating agencies in Malaysia: CCRIS by Bank Negara, CTOS, and RAMCI Credit Rating Sdn. Bhd. For CCRIS, you can walk into Bank Negara outlets to get your free credit report while you will need to pay certain fees to subscribe to the other two to get a full report with credit ratings.

A credit score is important for the banks to decide whether you are a good paymaster and also if you deserve a better interest rate for a personal loan or any other financing products.

Hence, you need to make sure your credit score is always in its best condition by doing the following:

1. Check your credit score every six months. Request amendments from the agency if there is any mistake or outdated information.
2. Never make late payment or skip debt repayment.
3. Avoid legal cases.
4. Do not apply for too many financing products at the same time.

Read more:

• 5 ways to improve your credit score
• 3 steps to take if you don’t have a credit score
• Where to get a loan if you have a bad credit score
• 5 reasons why you can’t afford to ignore your credit score
• How to avoid getting screwed by bad credit ratings

• Late payment fee

If you ever make late payment for your personal loan repayment, banks could incur 1%-3% of late payment fee to you in Malaysia. Apart from that, it will definitely affect your credit score, which could badly affect your application for another financing product in the future.

• Collateral or guarantor requirements

Collateral refers to the property or another asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Since collateral offers some security to the lender should the borrower fail to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans.

Guarantor, on the other hand, is someone who is close to the borrower and is willing to guarantee the latter to apply for a personal loan. He/she guarantees the borrower will be held partly liable if the borrower disobeys the contract and borne the legal requirements to repay the loan at any time.

However, most personal loans in the market do not require collateral or a guarantor as it is an unsecured loan.

Read more: What are the risks of being a loan guarantor?

Can you afford a personal loan?

Before applying for a personal loan, you must consider your financial appetite and capability to afford one. It is suggested that every individual’s debt-income ratio should linger between 40% and 45% so that you will not be overwhelmed by debts.

Debt-income ratio refers to the ratio of total debts to your income on monthly basis. For example, Ben earns RM2,000 a month and his ideal debt-income ratio is 40%, which means he can afford RM800 in terms of debts.

If you really the funds to resolve your issue or achieve a certain goal, you must learn to live modestly and plan your budget well in order to sustain a healthy credit score.

Applying for your personal loan

Once you have decided on a personal loan you want to apply for, it is time to start the application process. Before you get approved for your loan you will need to complete a thorough application process where the bank assesses if you are suitable for a personal loan

1. Ways to apply for a personal loan

The first step in getting your personal loan is actually applying. You can do this in a variety of different ways:

• Call centers - Some banks simply ask that you phone in. This is then followed by instructions on how to go about your application. Some may require you to head down to a bank branch but others may fax or email you a form to fill and return via the same mode.

• The bank’s website - Like phone-in applications, you will likely be asked to scan and email copies of required documents to the bank should you desire quick approval. Some banks only do partial online applications and ask for your contact details promising to respond with a phone call within 24 hours with further instructions.

• Walk into a branch - When in doubt, you can always just walk into your chosen bank branch and ask about loan applications. Usually, these banks aim to provide customers with fast approval loans that require little documentation. If in doubt, check the bank website or give the customer service center a call.

• Comparison sites like CompareHero.my – Although most banks will gladly help you get a personal loan, individual banks can be little too subjective in trying to sell you their personal loans. Be using a comparison platform like CompareHero.my, you can compare interest rates and requirements all across the industry and enjoy a streamlined and easy application process.

2. Documents required

Ensure that you have all documents in order for a successful personal loan application. Most banks require the following:

• Copy of your NRIC
• Copy of latest 1-month payslip or 3 months commission slips
• Copy of latest 3 months bank statement showing salary
• Latest from BE/EPF Statement not exceeding 12 months old

Making your Personal Loan application a success

Before you start applying for a loan, check where you stand financially. The first thing a bank will look at when you submit a loan application is your credit record. If you have bad payment habits like missing payments or making frequent late payments, chances are the bank will not approve your loan application

1. Be Disciplined

Polish your credit record and make prompt payments for all of your financial commitments for at least 6 months (the longer the better!) before applying. Remember, even if you are not applying for a loan you should still be making prompt payments, not to mention it helps increase the chances of the bank approving your application.

Through your credit report, banks will be able to see your financial history of up to 6 months. If you have been missing or making late payments a few months before you apply for a loan, there’s a strong possibility the bank will reject your loan application because of your poor payment pattern.

2. Create a credit history

Banks are also reluctant to approve loan applications from individuals without any credit history. Think someone who has never had a credit card or financial commitments (such as hire purchase loan or mortgage loan). This individual will then have no credit record for the bank to analyze when they process the loan application. Hence, it’s good to have any sort of financial commitment first to increase your loan application approval.

3. Read the fine print of terms to ensure you satisfy all requirements

Besides the basic documents required for each personal loan application, you will most likely need to supply additional documents, depending on where you are employed. Check the requirements below:

4. Clear off unsettled debt

Before you start applying for a personal loan it would be smart to clear off any outstanding debt you might have. Outstanding debt can have negative effect on your credit score and might complicate your application process.

Why did your personal loan application get rejected?

Despite all your best intentions, your application can still be rejected. Don’t worry! This does not mean that you can never borrow money again. To make sure this does not happen again, you have to find out why your application got rejected and focus on fixing that issue. We have listed the top reasons, why personal loan applications get rejected.

1. You have an unfavorable credit score

While assessing your loan application, banks value your credit score very highly. Credit score engines analyze your repayment behavior based on your CCRIS (Central Credit Reference Information System) report. Your credit score basically tells the bank how well you have been managing your money in the past. However, not all banks calculate credit score the same, as each bank has different risk standards.

That being said, here are the top things that banks take into account when calculating your credit score:

• No track record with CCRIS? (zero CCRIS is not necessarily good)
• Number of credit cards you have recently signed up for
• High frequency of borrowing in a short span of time (in the last 6 months)
• Credit card(s) showing high utilization (high spending)
• Credit card(s) with ‘over limit’ status
• Repayment pattern in the last 12 months
• Whether you are highly leveraged on unsecured loan(s) (personal loan)

A clean CCRIS report without any history of debt is not necessarily good because the bank cannot see how you handle your debt and this increases risk. Read this article here on what you should know about credit reports.

2. You have a Bad Status in CCRIS

If you have any accounts which repayments were not made over a prolonged period (normally more than 6 months for a personal loan or credit card, potentially longer for a secured loan), your record may be red flagged as a "special attention account" on CCRIS. Generally, banks will not proceed with your loan approval upon seeing any red flags, even though you have a good track record for your other credit facilities in your CCRIS report.

Other warning signs from your CCRIS file are items such as enrolling yourself into AKPK (a debt management service under the arms of BNM), or legal actions taken against you previously. Such remarks will not be erased from the system despite regularizing your payments for more than 12 months.

3. You are facing bankruptcy

If you are officially declared a bankrupt, you will not be able to get any new loans, refinance or top-up any mortgage facilities. Bankruptcy status is published in the newspaper daily. If you have been declared bankrupt, either by a particular bank, individual or by an organization, your record will be available permanently in CTOS (Credit Tip-Off Service) for reference.

CTOS captures and compiles bankruptcy status, which is published in the public sources. CCRIS only captures the bankruptcy status, if you are declared bankrupt by a bank.

Read more:

• MFPC explains reasons young Malaysians are landing themselves in bankruptcy
• 7 red flags you could be heading towards bankruptcy
• The first step in avoiding bankruptcy is to be fully aware of it
• What you must know about bankruptcy in Malaysia

4. Your Debt Service Ratio is not up to par

Knowing the ratio of your debt-to-income is important and key in getting your loan approved. This is a formula used by banks to evaluate your affordability level.

The Debt Service Ratio (DSR) has become the most common rejection reason, where approximately 35% to 40% of loans are rejected due to this. Different banks have a different DSR cut-off or capping (eg: 60%, 70%, or some even up to 80%).

There are 2 key elements in improving your DSR ratio, Firstly, having the bank recognizes your best and highest income is key as it ensures your DSR ratio gets lower. Next, is to manage your monthly commitments/debts.

5. Incomplete documentation

Before submitting your application, make sure you thoroughly review the forms and documentation before submitting. This will help to avoid errors, as that will delay your application, or cause your application to be rejected. Therefore, make sure all of the information are correct and that you have submitted all of the required documents with your personal loan application.