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  • Flexi Loans Versus Non-Flexi Loans

    When applying for a home loan, you may have come across the term “Flexi Loan”.

    In order to fully understand what a Flexi Loan really is and where it came from, let’s take a look at regular loan products and interest rate calculations.

    How is interest calculated on a loan?

    You interest payments have two portions – one that reduces the principal amount owed (your loan amount) and another that reduces the interest payable on this principal amount.

    So, logically, the higher your principal amount owed, the higher will be your interest payable – and the first few EMI payments go towards paying off the total interest portion of the repayable amount – leaving the principal pretty much intact, or just slightly reduced.

    In order to counter this, borrowers make additional payments and bullet payments in order to reduce their principal amount owed. The lower the principal amount is, the lower the interest payable will be.

    Now the borrower faces the problem of liquidity – having cash on hand to meet emergencies and obligatory expenses as and when they arise.

    Basic Term Loan

    This is what a loan basically is – an extension of a lumpsum credit from a bank which is repayable in a series of regular payments of a predetermined amount for a predetermined tenure.

    In order to clear off the principal part of the loan earlier, it was required for the borrower to send a letter to the bank requesting that such an arrangement be made possible. Additional payments, too, had to be cleared in this way – at the discretion of the bank making a special consideration in a case to case basis.

    There have been reported cases where people have made additional payments on their outstanding loan amounts thinking that it would reduce a sizeable chunk from their debt. This usually wouldn’t work – as the money would simply sit in the loan account as pre-payment, neither gaining any interest as a deposit would, nor helping clear off any extra interest/principal on the loan amount.

    Even in cases where the bank had been specifically requested to make a consideration to accept an additional payment to reduce the outstanding balance, it worked against the borrower – as the money once paid could not easily be withdrawn to meet emergency expenses.

    Banks didn’t want to reduce the size of the principal amounts owed (by way of large one-time payments) as it is on these principal amounts that they earn interest.

    Loans weren’t able to evolve and be the customer-friendly, flexible products they are today, as banking systems and processes weren’t nearly as advanced as they are today.

    Semi-Flexi Loan Malaysia

    Basic Term Loans had their drawbacks and limitations – hence the evolution of the Semi-Flexi Loan. Even though it wasn’t directly termed as such in its initial days, it basically was used to refer to the new types of loans in Malaysia – which could be paid off with additional payments in order to reduce the repayment burden undertaken by the borrower.

    For semi-flexi loans, borrowers did not have to submit a formal letter to the bank requesting them to make an exception in their case and accept additional payments towards reducing their outstanding principal loan amount.

    Additional payments made under these are not considered as pre-payment, but as actual additional payments on the outstanding loan.

    Withdrawals of additional payments made ahead of schedule was allowed, but for a fee of around RM50 to RM100 per withdrawal (from the loan account).

    All property term loans on offer by major commercial banks in Malaysia today are semi-flexi loans.

    Money isn’t entirely liquid, but is available as and when required.

    Flexi Loan Malaysia

    This is the most flexible loan option – meaning that the borrower can deposit and withdraw money in the loan account as and when he / she pleases. Ideally, there is no charge associated with these deposits and withdrawals, irrespective of the amount in question or the frequency of these transactions.

    In order to achieve this level of flexibility, banks tie in a Current Account to the loan.

    EMIs are deducted from the Current Account every month on an allotted date and are directed towards repaying the loan, and any extra money that’s kept in this account goes directly towards reducing the principal amount outstanding.

    For example, a borrower who’s taken out a property loan of RM300,000 but has RM200,000 in the linked Current Account will only incur interest (as calculated) on RM100,000 (RM300,000 – RM200,000) thus greatly reducing his outstanding liability.

    Maintaining this Current Account, however, incurs a monthly charge somewhere between RM5 and RM10 (per month) depending on the bank from which the loan has been taken.

    Interest rates are also lower and more favourable in the case of regular or basic Term Loans, as additional features and flexibility don’t come free.

    Which type of loan is for you?

    It’s an easy decision once you have the facts and consider your own personal situation.

    • If you have a good amount of spare cash that you can use as an additional payment to clear your loan early, go for a flexi loan. The slightly higher interest rates here won’t hurt you too much if you’re able to effectively reduce the amount on which interest is being charged.
    • If you’re usually low on cash and the loan is your only source of funds, and you are just able to meet your EMI payments each month – go for a regular term loan and make use of the lower interest rates.
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