Have you ever heard of a flexible loan? You might have come across this if you have ever applied for a home loan or if you are in the plans to get one.
What is a Flexible loan?
To understand what is a flexible loan, you must first understand what the basic terms and fundamentals are. What makes this most important is that you must understand how to calculate the interest when it comes to such loans.
Calculating the interest
How this works really is that it practices the reducing balance concept. This simply means that a part of your installments will contribute to the interest of your loan. Meanwhile, the other part of it will be used to pay the principal amount that you owed. In other words, you do not just pay for the principal amount but the interest as well. However, this will gradually change because when the amount you owed is higher, then the bank will allocate a larger portion of the installment for the interest charged.
At the same time, you get to pay as little interest as possible because it is actually the benefit of being a borrower. This is the very reason why borrowers will try to make more payments so that they can reduce the amount that they owe the bank. Some would go for what is known as bullet payments which are basically large cash payments. In doing so, they can save on the interest that they are paying.
When someone does that, they fall into a problem with liquidity. This means that they might be in a situation where they will need additional cash because of an emergency.
A Basic Term Loan
Another concept that you must know is known as a basic term loan. this is basically a term loan with a fixed repayment period. Basic term loans used to be the only type of property loans available in Malaysia. What this means is that you cannot make any additional payments to expedite the entire process. If you are holding a basic term loan with a bank and would like to make additional payments, then you must inform the bank in writing. This is to clearly state that you want to make such an arrangement so that the bank can adjust accordingly.
In a basic term loan, if you make an additional payment without informing the bank and assuming that it will reduce your principal amount, then you are gravely wrong! In fact, you will not affect the amount in any way at all. What it does is that it will become pre-payment and just kept there in the bank and slowly used to pay your installments. At the end of the day, you will still be paying the same amount to the bank just like you are paying the installments on time.
The situation will be worse if you need the cash due to an emergency or any other reasons. You will not be allowed to take out any of the additional payments made in the bank. This simply means that you must be absolutely sure you do not need the money if you are going to make any additional payments.
Why banks were so rigid then?
There are reasons why banks were so rigid then when they offered basic term loans. This was because there were no systems that are so advanced as they are today. On the other hand, banks still needed to earn their interest which is why they discouraged customers to reduce their payments.
What is a semi-flexi loan?
There is something known as a semi-flexi loan. As the name implies, this is an improvement from the basic term loan concept. Introduced not too long ago by Malaysian banks, this is seen as an attempt by the institutions to reduce the restrictions for customers to make additional payments in trying to reduce their owed amounts. With semi-flexi loans, customers could make additional payments which will not be placed as pre-payments but will be used to reduce the principal amount owed. Meanwhile, customers could now withdraw additional amount in their accounts if they need to. However, customers intending to this will have to pay a processing fee and would need time as well. Because of this flexibility, all property loans offered by banks today are by default semi-flexi loans.
What about Flexible Loans?
On the other side of the spectrum is what is known as a flexible loan, sometimes referred to as flexi-loan in short. This is the type of loan that allow you to withdraw or deposit money into the loan account as and when you wish. The good thing about this arrangement is that there will be neither additional procedures nor charges involved. What the bank usually does is to connect your loan to a Current Account. How it works is that the installment will be reduced from your Current Account and additional funds in your account will be used to pay the principal amount.
How is this calculated?
If you took a flexible loan say for S$500,000 and you have put in S$300,000 into your current account (which is connected to your loan account), then the interest will be calculated on amount owed which in this case:
S$500,000 – S$300,000 = S$200,000.
This simply means that the interest will only be imposed on the SG$200,000 which means you have saved interest on the S$300,000. This is a great option if you have a lot of spare cash which you can park inside your current account. Otherwise, it would be best to take a default loan for your property which is the semi-flexi concept.