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The Difference Between Conventional and Islamic Loans!

08/08/2022

In recent years, the government has started to actively promote Islamic banking, one of which is Islamic Financing. Many people think that Islamic loans are only for Muslims, but this is not true.

 

The loans offered by domestic banks are mainly divided into Conventional Loan and Islamic Financing. Islamic loans, as the name implies, are financial products that conform to the teachings of Islam.

 

Conventional loans levy interest on the borrower, and if the borrower can afford to pay off the loan early, he or she can save on interest expenses. Islamic loans, on the other hand, do not allow interest to be charged, but rather profit instead of interest.

 

In Islamic loans, the bank will calculate the total amount of the loan at a fixed interest rate. For example, if the interest rate is 10% and the loan is for 30 years, the bank will directly calculate the total loan amount to be paid for 30 years. If the national bank reduces the interest rate, the bank will return it to the borrower in the form of a rebate.

 

In fact, Chinese people can also apply for Islamic loans, which have several benefits, such as the availability of award tuck.

 

Advantages of Islamic home loans

1. no exit penalty (exit penalty), but depending on the loan package (not absolute).

2. Based on a fixed interest rate, the bank will not charge additional interest in case of late payment. Of course, the bank may impose some charges such as a deferment penalty to prevent the borrower from not paying the loan regularly.

3. in accordance with Islamic principles, the total amount of the loan is clearly calculated and stated in the loan agreement, and the borrower must bear the total amount of the loan.

4. the borrower will not be affected even if Bank Negara Malaysia increases the interest rate because the reception office has stated the maximum interest rate.

5. Banks share the risk. In the case of a “partnership” underpinned by a joint agreement, the bank and the borrower each have a stake in the property, so if anything goes wrong with the house (e.g., it is put on hold, destroyed by natural disasters), the bank must also bear some of the losses, which means that the bank shares the risk with the borrower. In any case, there does not appear to be a similar situation at present.

6. The government offers incentives. There is a 20% discount on stamp duty on sale and purchase contracts, but this is only intended to offset the difference in cost of traditional mortgage stamp duty.

7. Stamp duty discount. If refinancing, i.e. switching from a conventional mortgage to an Islamic mortgage, the outstanding amount of the loan is 100% stamp duty free. That is, if the outstanding loan amount is RM500,000 and the borrower wants to borrow RM700,000 after refinancing, he only needs to pay stamp duty for an additional RM200,000.

 

Disadvantages of Islamic home loans

1. Even if you have extra money to pay off the loan early, you will not get the interest rebate.

2. It is more difficult to apply for Refinance and restructuring loans if you have a history of loan defaults.

3. It is more difficult to apply for Islamic loans if you work in an industry that does not conform to the Islamic rules. For example, gambling, alcohol and other related jobs.

4. Islamic loans are not as transparent as conventional loan contracts in terms of the terms and conditions such as default fees and conditions, early repayment of loans, etc.

 

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