Personal Loan Interest Rates: What to Know Before You Borrow

One of the most important, yet often misunderstood concepts in borrowing money is the interest rate. Understanding borrowing costs and the interest rate is important, because it affects how much you repay.

For personal loans, the interest rate offered by the lender depends on your credit profile and risk level. It may also depend on whether the loan is secured or unsecured.

In this article, we will break down:

●       What is a personal loan interest rate?

●       How do secured and unsecured loans affect interest rates?

●       Why are personal loan interest rates usually higher than other types of financing (i.e. mortgage or car loans)?

●       What determines the personal loan interest rate you may get?

●       How to calculate personal loan repayments?

●       How to evaluate whether the loan is right for you?

By understanding how personal loan interest rates work and why they vary, you can make better financial decisions.

What is a Personal Loan Interest Rate?

In general, when a moneylender lends money to a borrower, there is always a risk that the borrower may not repay the loan.

The same applies to personal loans. To cover this risk, the personal loan provider charges an interest rate. This is the cost of borrowing money from the moneylender, which you will need to pay in addition to the amount originally borrowed(the principal).

For example, if you borrowed RM10,000 from a personal loan provider, you will not only repay the RM10,000 borrowed. You will need to repay the RM10,000 plus an interest rate charged over time.

The higher the interest rate, the more expensive the loan becomes overall.

The interest rate will directly affect your monthly instalment and the total amount you repay over the life of the loan. So it is essential to understand how interest rates work before committing to any personal loan.

Secured vs Unsecured Loans: How Do They Affect Interest Rates?

Let’s first look at the differences between secured and unsecured loans. We will focus on how they affect interest rates.

In the examples below, you will see that personal loans can be secured or unsecured. This depends on the loan product and provider.

Loan Type	Secured loan	Unsecured Loan
What is it?	A loan backed by collateral, which is an asset that the lender can claim if the borrower fails to repay the loan.   Examples of collateral include real estate, vehicles, fixed deposits, or stocks.	A loan that does not require any asset.   Approval is mostly based on the borrower’s overall financial profile and health.
Likely benefits	• Lower interest rates • Longer repayment periods • Potentially higher financing amounts	• Easier to apply and get approval • Quick cash disbursement • Funds can be used for various purposes • No collateral required
Examples of loan products	• Housing loans (mortgage) • Vehicle financing (hire purchase) • Some personal loans	• Most personal loans • Credit card and certain credit facilities • Some other short-term financings
Implications on interest rates	The moneylender has some form of protection through the collateral, so they can generally offer lower and more attractive interest rates.	The moneylender takes on a higher level of risk, so the interest rates charged are usually higher.

 

Why are Personal Loan Interest Rates Usually Higher?

Even if some personal loans are secured, their interest rates are often higher compared to housing or car loans. This is because personal loans generally carry a higher lending risk and are shorter-term financing products. 

In Malaysia, licensed moneylenders are subject to the interest rate limits set by the Moneylenders Act 1951. Under this Act, the maximum annual interest rate is 12% for secured personal loans. Unsecured personal loans can have rates up to 18%.

By comparison, banks and financial institutions often offer housing loans at lower rates, typically around 5% or less. This is because the lender has stronger security. If the borrower fails to repay the loan, the lender can seize and sell the property to recover the outstanding amount, significantly reducing the lender’s risk.

Although secured personal loans require collateral, the interest rate can still be higher (up to 12% per year). This is because the security may not be as strong and the assets are harder to recover.

For example, properties that often hold strong long-term value back housing loans. Vehicle financing ties to a registered asset, so lenders can repossess it more easily.

Secured personal loan, in comparison, may involve:

●       Assets that are lower or fluctuating in value

●       Collateral that is more difficult to recover or liquidate

●       Shorter loan tenure

●       Smaller financing amount

 

To go one step further, an unsecured personal loan is a loan provided without requiring the borrower to pledge any assets or collateral. To compensate for the higher risk involved, unsecured personal loans generally carry higher interest rates, which can be up to 18% p.a.

In other words, the interest rate charged reflects the perceived risk of a probable default. If a lender perceives the risk of a borrower not being able to repay the loan, the higher the interest rate offered will be.

Considering that personal loans are usually quicker and more flexible, lenders often face higher operational and credit risk. All these are factors why personal loan interest rates can be higher.

This doesn’t mean personal loan is bad, it just serves a different purpose. It offers flexibility and quick access to funds, without collateral, but at a cost that reflects the risk.

    

How to Calculate the Personal Loan Repayments

Before taking a loan, it is important to understand how much you will need to repay each month. It is equally important to know the total amount payable over the full loan tenure, including both the principal amount and the interest charged.

For this purpose, ACOM provides an online personal loan calculator tool to help you estimate your repayments You can access the calculator here:  Personal Loan Calculator

Using the calculator can help one get a better picture easier.

Example Calculation:

A personal loan calculation can be illustrated as below:

●       Loan amount: RM20,000

●       Interest rate: 8% per annum

●       Tenure: 3 years

Based on the information above, one may estimate the monthly instalment repayment to be approximately RM680 – RM690. Over 3 years, the total repayment would be around RM24,800.

If you increase the tenure to 5 years, you will reduce the monthly instalment to approximately RM460–RM470. However, the total repayment would be around RM28,000 as the lender would charge interest for a longer period of time.

Why Total Repayments Matter

Most borrowers tend to focus on the monthly instalment because it reflects immediate affordability.

However, the total loan repayment is equally important.      As illustrated above, a lower monthly instalment over a longer repayment period may seem attractive. However, it often results in paying more interest overall, making the loan more expensive.

Conversely, a higher monthly instalment with a shorter tenure may reduce the total interest charged and lower the overall cost of the loan.

Thus, the key is to strike a balance between maintaining affordable monthly repayments and minimizing the total amount paid over the loan tenure.

Does a Higher Interest Rate Mean a Personal Loan is Always Bad?

Not necessarily.

A higher interest rate often reflects more risk for the lender. But it does not always mean the loan is wrong for you.

There may be financial situations where a personal loan with a higher interest rate still makes sense, particularly      when quick access to funds is needed or when other financing options are not available. What matters more is whether the loan suits the borrower’s financial needs and repayment ability at that particular time.

Before making a borrowing decision, you should:

●       Understand all terms and conditions

●       Evaluate monthly affordability

●       Consider the total repayment cost

Final Thoughts: Borrow Based on Affordability, Not Just Approval

Getting approved for a loan does not mean one should automatically accept it. Before accepting an approved loan, take time to assess whether the loan is truly affordable over the long term.

To do this, consider more than just the headline rate. Also review your monthly cash flow and current commitments. Think about your future financial goals and your current needs. A well-chosen loan should support your needs without creating unnecessary financial pressures in the future.

About ACOM(M)

ACOM(M) is a KPKT-licensed online personal financing provider in Malaysia, with ISO/IEC 27001:2022 certification. We offer trusted, transparent loans with easy application and fast approval.

Follow us on our blog to get more useful tips on personal finance and responsible money management. You can also register an account for online personal loan applications. If you already have an account, apply for personal financing today.