Personal Loan Early Settlement in Malaysia: What Happens?

Personal Loan Early Settlement in Malaysia: What Happens?

Many Malaysians take out personal loans to manage various financial needs. However, circumstances can change, and you might find yourself wanting to settle the loan early. This article explores the intricacies of personal loan early settlement in Malaysia, including scenarios where it's beneficial, calculation methods, potential consequences, and crucial considerations before making the decision.

When to Consider Early Settlement

There are several situations where early settlement of your personal loan might be advantageous:

• Applying for a Mortgage: A good debt-to-service ratio (DSR) is crucial for securing a mortgage. Early settlement of your personal loan can significantly improve your DSR, increasing your chances of obtaining a home loan.

• Freeing Up Financial Resources:  Settling your loan early frees up monthly payments, allowing you to allocate those funds towards other financial goals, such as saving for emergencies or investments.

• Lowering Your Debt Service Ratio (DSR): As mentioned earlier, a lower DSR makes you a more attractive borrower for lenders. Early settlement reduces your outstanding debt, leading to a more favourable DSR.

Calculating Early Settlement Costs

There are three main methods for calculating early settlement costs in Malaysia:

1. Rule of 78: This method considers the interest already paid throughout the loan tenure. It's a slightly complex formula, but financial institutions typically handle the calculation.

Here's a simplified explanation: Imagine the loan tenure as 78 units. Each payment covers a specific portion of the principal and interest. Early settlement means you haven't paid the full 78 units, resulting in a recalculation of interest based on the remaining units.

2. Concept of Ibra' (Shariah-compliant loans): Islamic banking uses the concept of Ibra' for early settlement. It involves calculating the remaining profit based on the remaining loan period. This method generally results in lower early settlement charges compared to the Rule of 78.

Formula: Early Settlement Charge = (Outstanding Principal x Remaining Profit Rate x Remaining Tenure) / (Original Tenure)

3. Rebate (Ibra'): Some financial institutions might offer a rebate on the remaining interest upon early settlement. This essentially reduces the overall cost of early settlement.

Impact of Early Settlement

While beneficial in certain situations, early settlement comes with some potential drawbacks:

1. Early Repayment Charges:  Most banks in Malaysia levy early repayment charges as a percentage of the outstanding loan amount. These charges can range from 0% to 5%, depending on the loan agreement and the time remaining on the loan tenure.

2. Credit Score: Early settlement might have a temporary, minor impact on your credit score. This is because it reduces your overall credit utilization ratio (CUR). However, if you have a good repayment history, the impact should be minimal and your score should recover quickly.

Making an Informed Decision

Before deciding on early settlement, consider the following:

1. Assess Your Financial Readiness:  Ensure settling the loan early won't impact your emergency fund or other financial goals.

2. Engage with Your Financial Institution:  Contact your bank or lender to discuss early settlement options, including any applicable fees and the process involved. They can also provide a breakdown of the total settlement amount.

By carefully considering these factors and calculating the potential costs, you can make an informed decision on whether early settlement of your personal loan is the right step for your financial situation.

How Citywide Advisory Can Help You with Your 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 business alike. But don't worry, Citywide Advisory can help!

As a trusted bank loan and debt consolidation agency in Malaysia, our experts can analyze your credibility with the bank so you can proceed with your loan application process confidently.

But that’s not all — our commitment to your financial success extends beyond CCRIS analysis. We also offer a comprehensive range of financial services designed to meet your diverse needs , including:

• Personal loan rejected services

• SME loan rejected services

• Mortgage loan rejected services (for buying a new home, refinancing and cashback purposes)

• Rejected loan services

Personalised Loan Consultancy Services in Malaysia

Citywide Advisory is the BEST loan advisory service in Malaysia.

Citywide Advisory also offers personalized loan consultancy services, helping clients understand and improve their rejected loan applications for refinancing housing loans and more.

We customise our loan recommendations based on an individual’s needs, considering factors like:

• 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).

Our goal is simple: to help you find the right loan solution, paving the way to financial stability and debt freedom.

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