What is balance transfer? What is personal loan?

As shown in this article (read here), Malaysia household debts are expanding. Borrowing is very normal in Malaysia. You will also receive calls from loan agencies or banks offering you personal loan or balance transfer. This article is to explain these and what is the difference between these two.

Balance transfer works only when you have outstanding on your credit card(s). It allows you to transfer the outstanding amount owe on your existing credit card(s) to a new credit card. For example, if you have 2 credit cards and you have RM 5,000 debt on credit card 1 and RM 3,000 debt on your credit card 2. Instead of paying the minimum balance for these 2 cards and letting the balance to incur more than 15% interest rate, you transfer the whole balance of RM 8,000 to a new card. Now, many banks are offering 0% or lower interest to pay off the whole amount in the selected time frame. You can choose to pay off in 3, 6, 9 or 12 months typically. This method can help you to reduce the total loan interest (>15% compounding interest) and have a structured way to pay off your credit card loan.

Personal loan on the other hand can be used for any purpose. You can take the loan for your business, paying your expenses, house loan, etc. Generally, the effective interest rate is still about 6 to 8% with flat rate of 2% to 5%. It can be used to consolidate all your debts or getting new fund. Currently, you can apply for quick personal cash loan based on unused balance on your credit card. Let say your credit card limit is RM 30,000 and you have an outstanding balance of RM 10,000. So, you will be able to apply for RM 20,000 quick cash and pay it off at lower interest (e.g. 6 to 8%) at a longer period selected, i.e. 12 months, 24 months or 36 months. Please note that the banks normally quote the interest rate as flat rate which does not consider the effect of reducing principal throughout the loan tenure. The effective interest rate is therefore higher than the flat rate.

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