Loan Terminology

Loan terminology

Base Rate – Known in short as BR, it replaces the BLR from January 2015. Unlike BLR where the interest rate is determined by Bank Negara Malaysia, the BR is set by the banks themselves. They will have to take into account their funds and liquidity and revise the rate if needed. The banks however will need to publish their BR and their interest rate margin. For example, the bank would have indicated their Effective Lending Rate at 5.2% which is derived from their Base Rate of 3.6% and interest rate margin of +1.6%.

BLR  – Short for Base Lending Rate, it is the minimum rate that the bank will refer to before deciding an interest rate to lend you the money. Bank Negara Malaysia determines the BLR each year while the bank that you are borrowing money from will apply their own lending rate onto this rate. This however has since been replaced in 2015 by Bank Negara Malaysia to the BR or Base Rate. For customers whose loans were active prior to January 2015 (that applied the BLR), they will continue until their loans are completed.

Collateral – This refers to a valuable item that the bank will take as a security measure in giving you the loan. In most cases, it would be in the form of an asset or a property. This is usually required when the bank has doubts that the borrower might default on their loan payments. If that happens, the bank can take over the collateral to help finance the loan.

Credit Score – Banks will check your credit score before deciding if they want to lend you the amount you need. There are 4 sources that most banks will use to check on your account and gauge your credit health in Malaysia. They are the Central Credit Reference Information System (CCRIS) by Bank Negara Malaysia, Credit Tip-Off Service (CTOS), RAMCI and the Credit Bureau of Malaysia.

Final Amount – The final amount is in some cases referred to as the Settlement Amount. This is an important part of your loan because it is calculated including the interest and any other additional charges. In most cases, you want to know your final amount if you plan to pay off the loan. This amount varies depending on which day you are paying it off as the bank would pro-rate the interest based on days to the final payment.

Interest Rate – The most important factor in any loan, is the rate that the bank makes in lending the money to you. It is normally calculated based on an annual basis. For example, credit card transactions will have an interest rate of 18% per annum. You might get a personal loan with an interest rate of 5% per annum while Hire Purchase (car) loans have an interest rate of 3% per annum.

Minimum Payment – Minimum payment is mostly used for credit cards. In Malaysia, the minimum payment is 5% of the total amount you own in your credit card. If you incurred transaction charges of RM5,000 on your credit card (from zero), you would need to pay a minimum payment of RM250 the following month. If you paid RM1,000 then, it means you have an outstanding of RM4,000 still owing. Add RM50 (as an interest of 1.25%), which would be RM4,050. Your minimum payment for the next month would be RM202.50.

Months until payoff – Most loans are paid using installments which are based on months. In Months Until Payoff, it is the actual number of installments left before you finish paying the loan.

Principal Balance – The principal balance of a loan refers to the amount that you are due and still owing.  Basically, it refers to the amount that you borrow and that you must payback. It is the size of the loan you took from the bank. When you make your payments (installments), the principal balance gets reduced. This can be a car loan, a personal loan or a mortgage. If you borrow RM50,000 to purchase a car, that would be the initial principal balance. In certain cases, amortization occurs where the principal balance and the interest is separated so you know which portion of your installment is paid to which part of your loan. For instance, you pay RM10,000 as the down payment for the car, hence you need to borrow RM40,000 from the bank who charges you 2% as annual interest. The RM40,000 is your principal balance. In the first month, the interest would be RM66 (based on 2% over 5 years). That means your principal balance would be RM40,066. Once you made your first installment of RM500, that balance is reduced to RM35,066. The next month, an additional RM66 is added to the principal balance.

Settlement Penalty – This is a fee that you are charged if you pay off the loan before the term is up. This is a common practice by banks to discourage borrowers from settling their loans early as it would mean the bank would earn less on interest. The penalty could be a fixed amount (RM50 or RM100) or could be a percentage of the outstanding balance owed to them

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