By Sabrina Loh
Whether you’re up against a massive medical bill, in need of capital to start a company, or planning your dream wedding, personal loans are an excellent way to unlock funds quickly.
It can also be used as a powerful tool to boost your credit score.
Personal loans are flexible consumer loans that can be used for just about anything you want. But before you apply for one, it’s vital to get acquainted with interest rates, as it’s one of the most important factors in choosing a loan.
Read on to learn more about how personal loan interest rates are structured.
What is an interest rate?
An interest rate is the percentage of the principal charged by the lender for the use of its money.
The principal is the amount of money loaned.
All types of loans, including car loans, home loans, student loans, and personal loans incur an interest rate.
Types of interest rates
There are two types of interest rates that are applied to personal loans — fixed interest rates and floating interest rates.
Fixed interest rates
With fixed interest rates, the interest rate remains fixed and will not fluctuate throughout the entire loan tenure.
Advantages of fixed interest rates
Borrowers know exactly how much to pay every single month and won’t be blindsided.
Interest rates remain fixed, even during a rising interest rate regime.
Disadvantages of fixed interest rates
Borrowers might end up paying more in the long run, and won’t benefit from falling interest rate regimes.
Floating interest rates
With floating interest rates, the interest rate can fluctuate during the loan tenure depending on the Reference Rate.
The Reference Rate is market-determined and controlled by the bank, thus can change very quickly, affecting the interest rate.
Advantages of floating interest rates
Floating interest rates are comparatively cheaper than fixed interest rates
Borrowers could save money by paying less interest during a falling interest rate regime.
Disadvantages of floating interest rates
Monthly instalment amounts could increase
Which should you choose?
That all depends on your circumstances and preferences.
Most borrowers opt for floating interest rates because it’s cheaper’, and could save them money in the long term, especially if the Reference Rates fall.
But if you’re looking for predictability so you can plan your monthly budget accurately, and would rather skip the thrill of fluctuation, fixed interest rates may be for you.
So shop around and compare the interest rates as well as the interest rate types before locking in on a personal loan.
By the way…
As part of our mission to make banking accessible for everyone, we’ve launched Malaysia’s first 100% digital loan, which eliminates the hassle of applying for traditional personal loans.
No need to wait in line at the bank with confusing documentation. Just download our app and click apply to get your loan disbursed to your BigPay app in as little as 5 minutes.
We promise you’ll love it.
Learn more about it here.
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