If you have an idea about the various types of loans offered in Malaysia, you should have come across the main differentiators – Conventional and Islamic financing. Let’s take a look at what conventional financing is and how you can benefit from choosing a conventional loan product.
What is Conventional Financing?
Simply put, it is a type of financing where financial institutions offer cash to borrowers and charge interest on the principal amount. The borrowers will have to repay the loan amount along with the rate of interest on a monthly basis until the completion of the loan tenure.
Types of Loans Available
The following types of loans come under conventional financing:
Fixed Rate Term Loan
A fixed rate term loan is offered to those who are looking for a financing scheme at a fixed interest rate. The interest rate remains fixed even if there are changes in the Base Rate (BR) and Overnight Price Rate (OPR). In Malaysia, the duration of a fixed rate term loans come with a tenure 35 years or till you are 70 years of age. Even though the monthly payments are much lower, the rate of interest is higher due to the long tenure.
Variable Interest Rate Term Loan
A variable or a floating interest rate loan comes with varying rates of interest. If there are any changes to the OPR or BR, it affects the interest rates of all the variable loan schemes directly. Unlike fixed rate term loans, the rate of interest is usually much lower. This is one of the major reasons why many Malaysians opt for them.
A flexi loan gives the borrower the option to make payments in advance to reduce the rate of interest and cash withdrawals whenever they want to during the tenure of the loan. You need to open a current account when you opt for a flexi loan. When you make repayments in advance, the interest rate for that particular day reduces. If you continue doing so, not just the interest rate, but the loan tenure also reduces.
Semi-flexi is similar to a flexible loan, just that the borrower will not be able to withdraw cash whenever they want during the loan tenure. They will need to take the bank’s permission to get access to cash, and it is up to the bank to agree or disagree with the request. However, the option of advance payments is available, which will help in reducing the burden of a high-interest rate.
What are The Benefits of Conventional Financing?
- If you want to make any changes to your loan, you need to up-stamp the agreement you have signed with the bank, which won’t cost you much.
- The loans comes with a high margin of financing.
- Most major banks in Malaysia offer conventional financing.
- Loan disbursement is quick and hassle-free.
- Certain plans offer 100% property financing.
Difference between Conventional and Islamic Financing
Conventional financing is based on the concept of making interest. Islamic financing, on the other hand, is Shariah-based, which is against the concept of lending money. Islamic financing buys the product on behalf of the borrower and sells it back to them at a profit rate.Banks in Malaysia provide both conventional and Islamic financing.
Who Should Apply For a Conventional Loan?
- Applicants with an average or a good credit score.
- Applicants with a higher Debt Service Ratio (DSR).
- Applicants who have the ability to save more can opt for flexi home loans.
- Applicants who want to pay a minimum monthly instalment can opt for a fixed or a variable rate term loan.
- Those who are eligible for certain conventional home schemes such as Skim Rumah Pertamaku (SRP)/First House Deposit Financing Scheme which is specifically for first-time home buyers.
If you are thinking of taking a conventional loan, you need to do a research to find the best home loan schemes offered in Malaysia. Compare the options available depending on your unique requirements and make a choice.