Home Loans Personal LoansVs.

Aysha MariaFinance Analyst

Loans come in a variety of forms and although they serve the same end goal of providing additional cash which is to be paid back with interest, they differ in terms of structure, interest rates and repayment tenure among a host of other differences. Loans are varied and are presented to the customer in terms of specialization. We have car loans, education loans, home loans and personal loans. Let us take a look at the different advantages and drawbacks of home loans and personal loans

PURPOSE

Home loans can only be used to purchase a home whereas a personal loan is a cash loan provided to the applicant and the applicant can use that money on any purpose they desire be it refurnishing a home, consolidating earlier debt or even financing a child’s marriage.

INTEREST RATESThe interest rates charged on a personal loan are flat rates and the effective interest rate paid on a personal loan will amount to 1.7 times the interest rate specified. So if the interest rate is 9% then the effective interest rate paid over a tenure of 5 years is close to 15.39%. On the other hand, interest rates levied on home loans follows a reducing interest method. The tenure of the loan decides how much interest you end up paying. A longer tenure home loan will lead to greater interest being charged.

ELIGIBILITY CRITERIAPersonal loans are more relaxed when it comes to eligibility criteria than home loans. This does not mean anybody can avail a personal loan. The eligibility cut off for personal loans are lower because of the size of the financing amount. Most commercial banks offer amounts starting from RM 2000 up to RM 250,000 whereas home loans tend to have higher financing amounts available. It is for this reason that minimum annual income requirements for personal loans are lower than that of home loans.

SOURCE OF MONEY

In Malaysia, Home loans are normally acquired through commercial banks such as Maybank, Citibank, RHB, CIMB, Bank Islam etc. but personal loans have 2 different sources. One is the commercial banks and many a times, the commercial banks with their eligibility criteria may not approve a personal loan due to reasons such as poor credit score or low income and in such instances people turn to the other option that is licensed money lenders. There are 3000 licensed money lenders that provide personal loans with an interest rate of 12% to 18% p.a. People do prefer commercial banks over money lenders as the interest rates are lower and money lenders usually manage to add in hidden fees and charges into the loans

Personal loans come with shorter tenures,

easier eligibility criteria, and faster approvals but have higher interest rates and lower financing amounts.

Home Loans have higher financing amounts available but the money can only be used to purchase a home. Whatever the advantages and disadvantages maybe, one should always try and minimize the amount borrowed and save up for a particular need rather than take out a loan.

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