Find Out Why Your Loan Interest Is So High

One of the most important things to consider before taking out a personal loan or mortgage is the interest that you will be paying. Interest can be summed up as the cost of borrowing money. The lower your loan interest rate, the more money you save over time.

Unfortunately, there may be some occasions where interest rates can vary wildly. If you are unlucky enough, your loan interest may end up much higher than you can afford. 

Top factors to affect loan interest rates

Generally speaking, there are some factors that you can control to qualify for lower interest, though there are some that are completely out of your hands.

To better understand why your interest rates can get so high, let us look at the factors that have the biggest influence on interest calculations.

Credit reports/scores

Credit reports and credit scores are one of the key factors that determine how much interest you will pay. They essentially let lenders know if you are trustworthy with money. Low credit scores would likely signal to lenders that you might not pay back your loan on time, thus resulting in higher interest charges. This applies to all kinds of loans, such as personal loans, mortgages, auto loans, and even credit cards.

Fortunately, credit scores are one such factor that you can somewhat control. Over time, you can take smaller loans over multiple lines of credit. Smaller loans mean an easier time paying them back, which in turn leads to an improved credit score.

Employment history and income

Some lenders will look at your employment history and income to determine whether or not you can repay your loan. Applicants who have been in the same job for multiple years or who have a higher income may look more financially stable than someone who changes jobs often. Those who seem to have a less stable financial background will likely only qualify for small loans with higher interest rates.

Other outstanding debts

The amount of existing debts you hold when you apply for a new credit facility can also affect your loan interest rate.

Debt-to-income ratio (DTI)

Lenders may sometimes look at a metric called the debt-to-income ratio (DTI) in order to determine how much of a burden a new loan will have on your finances. DTI measures your recurring monthly debt payments against your monthly gross income. Based on this ratio, they will determine your eligibility and interest rates for the loan.

Generally speaking a DTI of 35% or less is considered quite healthy. A higher DTI would mean that you are spending more of your income servicing existing debts, making lenders less confident in your ability to repay your new loan, thus potentially leading to higher interest rates.

Debt service ratio (DSR)

DSR may be more familiar to Malaysians especially when applying for a home loan. Basically,  your DSR puts a percentage number on how of your salary is used to pay debts and commitments. These include PTPTN loans, credit card loan, car loan, house loan, ASB loan and others.

Loan size and term

The size of the personal loan and the length of the loan term you are applying for plays a big part in how much you will be paying in interest. The term of your loan is how much time you have to repay it. A shorter loan term will usually come with a lower interest rate but larger monthly payments, which means paying even less in interest over time.

Larger loan amounts are considered high-risk by lenders. This may also affect the interest you will be paying as higher risk usually equates to higher interest rates.

Your downpayment

Most personal loans do not require a down payment. However certain loans such as mortgages and some auto loans may require one. Typically, the bigger the down payment you make, the lower the interest rate you will qualify for. This is due to lenders seeing you as less risky when you pay part of your loan upfront. A good rule of thumb is to pay 20% or more of your loan amount as down payment to qualify for the best interest rates.

Factors outside your control

Apart from the aforementioned factors that you have some control over, there are a multitude of other factors that are beyond your control that can influence the interest rates on your loans. These can include inflation, economic growth, government policies such as the diesel subsidies, and the monetary policies established by Bank Negara Malaysia.

All of these elements combined play a crucial role in shaping the nation’s economic landscape, thus affecting both investing opportunities and consumer behaviour.

For example, when inflation occurs, purchasing power falls and the central bank may adjust interest rates to curb rising prices. On the other hand, when inflation decreases, banks may lower interest rates to stimulate economic growth.

Currently, Malaysia’s Overnight Policy Rate (OPR) is set at 3.00%, as adjusted by Bank Negara Malaysia. This rate has been set since May 2023 and indicates a generally cautious approach to maintaining economic stability. 

Managing your finances with a fluctuating interest rate

If you ever find yourself in an environment with a fluctuating interest rate, you will likely have to adapt your investment strategies and begin looking for various saving options to maintain your finances.

Maintaining a diverse portfolio of investments can help mitigate any shocks that might occur in the investment market. Additionally, fixed deposits can be an excellent option for those seeking stability. They may not offer the highest returns, but by locking in your funds at a fixed interest rate, you can protect your savings against market volatility.

If you need help finding a good fixed deposit, you can try utilising iMoney’s Smart Search tool to find one that suits your needs. 

In addition to this you can also try to optimise your saving accounts in order to take full advantage of compounding interest. This can help enhance your savings over time, so it is highly advisable to regularly compare different account options across different banks to ensure access to the best rates available.

Need expert help? Try iMoney Advisory services to help you reach your financial goals faster.