CHAPTER 2

LITERATURE REVIEW

2.0 Introduction
This chapter will explain the failure of home loan application in theory based on
the reference of journals, articles, books and so on as research references. The
explanations include the definition of loan, definition of home loan, definition of factors,
definitions of failure, importance of home loan and types of home loan. This chapter
covers an initial overview in identifying factors that cause the failure in home loan
application.

2.1 Definition
2.1.1 Definition of loan
When the borrower is small and highly leveraged and the business with
less long-term debt, less tangible assets, and more volatile cash flows prefers
loans over public bonds, loans are more likely to have security covenant(Kim,
Kim et al. 2021). Understanding that loans are a suitable solution to one's
condition is one of the keys to being financially efficient. Loans are never a good
idea if, in the appropriate time period, someone can't afford to pay them back.
Based on Cambridge Dictionary, loan can be defined as the sum of money that is
lend, often from a bank, which has to be repaid, usually with an additional amount
of money that someone has to pay as a loan fee. Since lenders fear that the loan
will not be repaid by the borrower, they must mitigate the risk by charging a fee
known as interest, as the amount charged for accepting the loan. Loan can be
described as money that an individual borrows for personal use from a bank or
other financial institution (Ismail 2013). Loans are a form of consumer financing
that lenders, such as banks and financial institutions, offer to assist customers
with short-term personal finance shortages.

2.1.2 Definition of home loan

Home loans play a crucial role as an engine for equal economic
development by reducing poverty and avoiding the emergence of slums in the
economy(Satpathy, Patnaik et al. 2017). They also defined home loan as the
money buyer typically has to borrow from a bank or other financial institutions to
buy a property, usually backed by a registered mortgage to the bank on the
purchased property. Home loans are a wide-ranging issue, the notion of which can
differ across territories, regions and countries, especially in terms of the areas
covered.

2.1.3 Definition of factor

There are few definitions of factor. Based on Oxford dictionary factor can
be defined as a condition, reality, or influence that leads to an outcome. Other
than that factor can also be defined as a number or quantity which produces a
given number or expression when multiplied by another and a level on a scale of
measurement but as for this research the first definition is the most accurate
definition to describe the factor based on the research context.
 2.1.4 Definition of failure
Failures are a key concept in design thinking. The word ‘failure’ is often
used in a very broad sense(Von Thienen, Meinel et al. 2018). Forbes defined
failure as an absence or lack of accomplishment. This is a somewhat general
description of intent.

2.2 Importance of home loan

The need for home loans exists not because house prices are going up all the time,
but because, from a long-term saving perspective, home loans make perfect sense. Home
loans are not only a helpful tool for the average man to own a roof over his head, but they
also work in the long run to save money(Satpathy, Patnaik et al. 2017). People are
gradually opting for mortgage loans to buy their dream home with rapidly rising real
estate rates. Interest rates are dropping all the time, and to attract prospective home-
seekers, banks and housing finance firms are practically falling amongst each other.
Despite tax cuts and preferential loan rates, many people are still unable to arrange down-
payment funds, which turn out to be at least 15 percent of the value of the house. Banks
come up with home loan products called 'zero down payment loans' in which 100 percent
equity is given for selected properties, taking into account.

2.3 Types of home loan

Home loans in Malaysia can be classified into 4 main categories, and most
property loans are variable interest rate loans, where the interest rate is linked to the
banks' base rate (BR). The 4 main categories of home loans are basic term loan, semi-
flexi loan, full-flexi loan and Islamic loan. The most basic and conventional form of
home loan is basic term loan Owing to its simplicity, most individuals go for this type of
loan. In general, a basic term loan means that throughout his loan term, a person will pay
a fixed amount of instalment without having the flexibility to reduce the interest on the
loan at any time. Particularly in comparison to a basic term loan, a semi-flexi loan is
more flexible with regard to loan interest reduction. The different here is that if a person
has extra cash and want to dump it into the downpayment portion of his home loan, he
can do so to lower the interest on the loan, thus saving money in the long run. Unlike the
basic term loan, the borrower does not need to provide notice of any extra payment.
There is one limitation, however: without any ramification, the borrower will not be able
to withdraw the advance money paid for emergency uses. Doing so will entail penalty
fees.
Meanwhile full-flexi has the same features, but the borrower can now withdraw
his advance payments without any additional charges or penalties. A cheque book and a
linked current account will be provided to the borrower so that he can withdraw money at
his convenience at any time, in case you need to use it for emergencies, but be conscious
that the interest will be charged upon withdrawal. Last but not least, Islamic loans work
on the basis of interest-free transactions, as opposed to the three conventional loans
above. Under Sharia principles, it uses the Murabahah conception, where the most best
known rule is the ban on charging interest or riba. Therefore, where a conventional loan
charges interest on late payments and imposes compounding interest, Islamic loans do
not. Islamic loans operate on a Buy and Sell or Joint Partnership agreement in which the
bank buys the house and leases it over a period of time back to borrower on payment so
the 'resale' price is higher than the initial current market value of the property.

References
Ismail, S. (2013). "Determinants of Personal Loans Borrowing An Empirical Study."

Kim, Y. S., et al. (2021). "Vice or virtue? The impact of earnings management on bank loan
agreements." International Review of Economics & Finance.

Satpathy, I., et al. (2017). "Home Loan – A conceptual Framework." Journal of Advance
Management Research 5: 68-75.

Von Thienen, J., et al. (2018). "A Short Story of Failure."