% CONSUMER CREDIT fring them, ois are tun when you ae acqu none aren when you set about eting them. (Ogden Nash sane credit is necessary since an individual has a limited amount ‘une a resource to purchase. Credit enables him to expand his alte consumption by increasing his purchasing power. Consumer “8 apover to buy or borrow on trust. This is because you buy or {int and make the payment later. Consumer credit or consumer cbtmet can be defined asthe way of controlling money because cra ae Pid This helps to manage the debt by choosing a lower “ac oy attalowerinterest, Another suggestion is to prioritize als and there are steps to be taken: Crew Cretan emer sep eBENCY fund asa reser ‘e fund that will help you pay for “APenses in order to not ad YT . Use a credit card, allyou, our debts totally except the Mortgage. ‘to Six months’ worth of living a Problems such as a medical emergency or loss“These days many people can get into bad credit situation fh, cop rk otheirincome and expenditures. Many young aduie 2% tee at they ace being offered credit cards. Those who are sensipje ititeards that suit their needs sign up. Keep track of ther puree Strate vedi card ils in ll ach month and ignore any eer ge ‘There are others who may be fascinated by the amount of provided and may easily end up making lots of purchases on cre yy! raking the minimum payments on their cards. Then, one day they re justhow much debt they are in. This is when one needs a debt consoid,: Joan to get out of a bad credit situation. In Malaysia, the Credit Counseling and Debt Management Agen (CCDMA)yAgensi Kaunseling Dan Pengurusan Kredit (AKPK)is an agen, set up by Bank Negara Malaysia (BNM) to provide financial educatiy ‘credit counseling and debt restructuring services to individuals. All servis offered by CCDMA are free of charge. CCDMA is established to ensue that the household sector continues to be resilient by providing an avenue fi individual borrowers and potential borrowers to seek advice and assistance in managing their finances. To find out if you are in too much debt, you can use the following ratio. or known as the Debt Service Ratio (DSR); DSR compares your monthly income to your fixed housing loan, credit card and car loan repayments Debt/Income Ratio = Monthly Fixed Lean Repayment / Gros Monthly Income Let’s say your Monthly Fixed Loan Repayment is RM1,000 andyo% Gross Monthly Income is RM5,000. Debvincome Ratio = RM1,000/RMS5,000 = 20% Bear in mind that creditors will look at your debv/income ratio 0° how c able et OF bad your financial status is on a regular basis. In ordet 20 on credit, make sure that the percentage will not exceed 30% 94> ueren 4 Consin Cre 3 OF CONSUMER CREDIT vet redit can be classified as displayed in the igure below. ner Coos | creo can | pl | | evo] L_sesouiow 1 serena] Figure 4.1: Types of Consumer Credit OPEN ACCOUNT CREDIT ae Fo8 2 St 95Credit Card cat allows a peron to buy good and services oq wc it et nda by tanks in conuntion wi Se car css as VISA and MASTER CARD. BNM requis aan oat with an annual income of a Teast RMI8,000 0 apply ay, only india on the amount be used. The Timi wil pe sane pes of Vien or Master Card that you have, Credit card ten faints eeups of either standard ards or premium cards (god platiney var tlsckeands) Premium cards usually offer higher credit limits ad at card companies offer premium cards t0 people they consider tobe etter rei sk ‘The retailer is given a commission by the bank for such transaction carried out. ‘Transactions will be carried out by using a special machine placed together with asales voucher. The card will be placed on the mache by the retailer andthe details and amount of sales are entered on the voucher and signed by the cardholder/purchaser. In Malaysia, the first Islamic credit card was issued by Bank Isim and the card is named as Bank Islam Card (BIC). This isto avoid the word “credit” init to comply with purely the Islamic Syariah Principle. BIC works on combination of three (3) contracts which are Bai’ Inah (sel nd buy back agreement), Wasdiah (savings) and Qardul Hasan (charity lo: ‘The card is offered to Muslims and non-Muslims in Malaysia. ‘This card is completely free from any riba or gharar. Riba is us ‘cues an a ‘Which means an extra amount charged in transactions ing with silver, old or money. Ghar inty oF ambigty whan peg *y. tarar is defined as uncertainty removed fr ce the maximum prot camed bis en declared opin from BIC since the maximum po? Other examples - on fee of Islamic credit cards are the Al-Taslif Islami? Maybank), > "BaP Bank Berhad) and the ikiwan card (issued bYGurr : Comumen Cr of credit cords avant ge a means for cred Pao ‘ through eash advance. source of free credit if paid within specified time period (up to four nerest free © swoeks) Essie 0 U8 enient since there is no need to carry cash, coment tncentives through loyalty schemes, point reward systems, air miles and thers. i ds with your + Purchase protection; where if you buy some faulty goo tear normally it will be 100% insured fora month or two. Lass protection; if you lose your credit card, call the issuing bank, cancel the card and you will get a new one. Disadvantages of credit cards 1. Easy to get in debt. Costs related since interest charged to outstanding balances can be \cy/ high. In addition, a card holder may need to pay for a penalty ‘eto late payments, annual fees and if making cash withdrawal, the 'merestis calculated from the day the cash is withdrawn, The tsk of fraud, Overspending, Fraug i yttention on credit cards You rece heck thatthe we Your newirenewed/e hi laced credit card, always 'n Your name. Desttoy the old card by cutting 'P and magnetic stripe portion is completely 4 make sy sure the maga, = 7jard your Personal Identific 2. Safegu: 5 When using your card at retail outlets, protect your card as if it way seen ng emare that itis in your possession at all times. Check the charge slip and its’ amount when making online purchases. only give your credit card details on ie websites and companies that yOu trust, reliabl statement and report immediately if there are 5. Check your eredit card cr Ntansactions that you do not recognize oF are unauthorized by Ifthe card is stolen or lost. immediately report to your bank. 7. Notify the bank for any changes in address. ancial charges on credit cards 1 Annual Fee Annual fee helps to offset costs that issuers incur in maintaining accounts. The amount of annual fees depends on the type of card and credit card issuer. It normally ranges from RM60 to RM600. 2. Interest Charges Interest is charged on credit card balances rolled over beyond the payment due date. The percentage, or interest rate, can vary from card to card. The charge to be imposed on credit card is guided by BNM and itis as follows: (2) The maximum finance charges charged tothe cardholders shout not be more than 1.5% per month or 18% per annum the rev rates of 1.25% per month (15% per annum), 1.42% pet mont (17% per annum), and 1.50% per month (18% per annum) applied on all carried forward outstanding balances subje®t prompiness of your repayment record. The implemen'ation for this was on the 1" of July, 2008. However, effective 3!" 98 oe Naame ac —_| Jy 2009, interest rates on outstanding balances is reduce: drop of OS% | | | the late payment charges or fees will be ata minimum of RM10 or 1% of total outstanding balance as at statement date, whichever jk higher, or capped to. a maximum of RM100. However. ctfective from 31° March 2009, the late payment fees will be reduced to a minimum of RMS and a maximum of RM75 » ‘The amount of interest you have to pay and the time it takes to repay your balance in full will increase if only the minimum monthly yaymentismade. The minimum payment is 5% or RMSO, whichever is higher. 3. Charges on Cash Advance Ifcash is needed urgently. credit cardholders can get a cash advance fiom bank branches or through automated teller machines (ATM). The amount ofthe cash advance is deducted from your available credit line. A fee is often charged when obtaining cash advances. In addition, the interest rate is usually higher than those charged on unpaid balanes ‘ormally 3% per month and there is typically no grace period. Semputation of interest charges on credit cards a cel fies four (4) methods available in calculating the interest charges 99pcos Fasc Pe Daily Balance Including Current Purchase, 1 Average ;chases will be taken int -ahis ethos, curtent pur con, te clans ierest charges: a, average Daily Balance Excluding Current Purchayes Linder this method, curtent purchases Will Mot be takeq snsideration inthe caleulations of interest charges, in, Previous Balance Method {Under ths method. only the previous balance willbe included inj calculations of interest charges. 4. Adjusted Balance Method Under this method, the previous balance will be adjusted with paymeas and returns. This means that in order to calculate the interest charges, we have to deduct the previous balance with payments and retums Example 4.1: "Younave received your credit card statement fr the period baginning 15th Marc 10 141m Apei 2007. The details ofthe statement are stated below: tach 15 | Opening balance March 25 | Carrethree, Subang Jaya 528 | Caten, hah Alam — 1.0008 2 AS thy Gal a ae MAS ot eur ket Kuala Terononany | __= 401613 | Songkettnn, Kuala Terengganu | cart! 100vant now ronment 8a, i yous alae arte minimum payment rein payment andthe mayments 5%, YoU Wil use these methods ee i you cacatone tennwu™ verge aay baance pludng cure purchases, palanee excluding current purchases 9 ee ares aod 12 mettre wo wont eon rae Oty Bar na a » oe ng Cunet va: ave Day Bbc retreat ~pauance | AGGREGATE | se | aaLaNce 0200) 00 | = aggregate balance/no. of days 185,210131 = RM2,748.71 Boy terest ate x average cal DAAC? ‘Average dally balance Ineest amount 58% x RM2,748.71 = RNAI 23 Catanog bance = ending balance + lerest anest! Mina Fis 000 + AMAT.23 = RIMG,O41-23 payment = minimum payment rate = ing bab Bee x MG,041.23 = RM15206 usancng balance after minimum payment = ousan dr = mii payment «pia 041.3152 06 = PM2.600.17 cont 101ince Excluding Current ‘o Daily Balance on Averagt Calculations based © erases ns Purchases ‘a2; Average Daly Balance Exciudng Curent ‘ Table t PERIOD te balance/no. of days fa 9008 = AM2,078.19 rmonthiy interest rate x average daily balance 5% x RM2,074.19 = RM31.11 ding balance + interest amount /= RM1,900 + RMS1.11 = RM1,331.11 minimum payment rate x outstanding balance 36 x AM1,331.11 = RM66.56 (Oustandng balance after minimum payment = outstanding balance — minimum ‘Average dally balance Interest amount Outstanding balance Minimum payment payment = RM1,331.11 — RM6B.56 = IMI,264.55, (©) Calculation based on Previous Balance Method: Previous Balance Method: Interest amount = monthly interest rate x beginning balance ‘5% (FM2300) = AM34.50 (9) Calculation based on Adjusted Balance Method Adjusted Balance Method: Interest amount = (monthly interest rate)(beginning balance - Payments- returns) = 1.5% (RIM2300 — RM1000) = RM19.50 102cargo C2rds us are another means of payment, They are similar to eredit arge Charge mnt must be pad Fully every month, Examples of these cars at acan Express and Diners Club. ‘These cards allow the holder cardsare AMT yment within 10-12 days after the billng date, somite petal Charge Card rent stores or retail stores and petrol stations offer customers tes from thet stores only. Customers spend first and are billed aad ever, the retail stores fequire customers to pay the full amount aprage customers to apply for and use their cards. However, this type ea is nt available in Malaysia, arc evolving Credit Lines/Overdraft ‘This facility is associated with a current account, meaning that this credit facility operates by using a current account. The current account holder must get the approval from the bank in order to be able to overdraw hisaccount. The bank will notify the account holder the credit limit that heisallowed to have. An overdraft isa financing alternative to meet our immediate financing fei focexample to consolidate or pay-off all our high interest credit Is to seck immediate funds for crucial down payment on our dream mcrae when We need fast financing for that emergency medical the accox Ousandng begat Overdraven, daily interest will be charged on the (athe end of monty ‘at the end of each day but is only debited once a month loved tobe oneny Atte aecount. IF one fails to full utilize the amount ed awn, he/she will be charged a commitment fee on the t I. The prese Tm nature, '* PreseMt fee is 1% per annum. An overdraft is short- 103 ~~Interest is calculated! using the Rasles Section BBS (iv)] mple interest formula [Referto ABN Unterest Amount (1) = Principal (P) x Time (1) x Rate (Ry Where P- overdrawn balance at T1305 nd of each day comm re on the unutilized portion of the overdratt {ucthty with the exception of personal overdraft facilities with a limit upto RM250,000 in total, The ion of commitment fee that will be charged ke unutilized portion: [Refer to ABM Rules Section B, BS (ii) le x2 xi)y Commitment fee for the month At ) XI_= Acta interes pi for the moth XD oh Ke = interest te cared fr sven it Facility ‘ment fee for unutilized portion of overdraft f % per annum, Example 4.2 ‘Al plodgod hs house, valued at RM mi ‘Bank A provided an overeat ta Longing Rate (BLR) +t Following tansactions lion to Bank A for an overdraft facity cil of RIM500,000. The interest rate was Base oF annum. Ali's overdraft account recorded the | Date Transsetion Amount (AM) # June 2007 | alan bough down 250.000 ¥8.tane 2007 | waa 150,000 | 20June 2007 | Batanco brow fond 400,000 | 2o.say2007 | popess [itmeros.co0 {t-hly 2007 | alarco brought eras} 396000 cont 104jate he interest onthe overdraft acity fr the month of June tthe ues gs per annum esos 14-800% , Menon 10-8608 am 365 me aMre7 12 + AM1A2-74 -rI2,169.86, sang maine LR meanses om 6% per annum 7.0 pe snan mag uy, aetrmne the nore! payable onthe ‘overdrat tality eine month of July ravaoo 000<19:<850% RMGOO,000.12 850% ke , 365 365 rly “ans, 769.88 + IMB38.96 = RMa,608.22 scat ne comment 26 oman of ay. essmieg Pa os Cate te otpayged en te unutzes paion of he ovrra acty comet er ann conmiment ee for the month = e-xiy ; [reverse = -ason) -rnzconaa] 04 350% (¢usco.so-Az.608.22\1.00%) 85% =RM117.81 LOANS vent periods than tiated contracts od, interest Loans ae haya larger in amount and have longer repaym« that specify rea ‘The contract in loans are formal, negot ‘ie and the Loan il the purpose of the loan, amount borrowe' ote ender ong et schedule as well as the rights and obligation’ atom eomewer, Loans are usualy ‘one-off (lump-sum) and are expensive purchases. 105‘The main types of loans are 1. Personal loan. 2. Car loan. 3 Education loan. sonal Loan ne form of personal Toaas. The ried people, ranges from RM unt of salary. Approval may The only eligibity is ary for the past six consumer eredit in th toan amount under these loans for the sal ‘000 to RM 100,000 depending on the arn ome as early as 48 hours and without collateral. soiree borrower must be drawing 2 fixed monthly = ‘months from the current job. Banks provide such as home renovation. Id debts or paying child's and others, Personal loans can be secured or bad credit history, and want to borrow a bigamount ‘on is the best. For good credit borrowers. rate because the leans are we for any personal purposes ‘These loans at holiday tour, paying ol owning a car, wedding, tuition fees/ education unsecured. If you havea ‘of money, then the secured opt these loans give the advantage of a low interest secured by a collateral ‘Some of the features of personal loans offered by banks Affordable monthly instalment. Fast approval and disbursement. Flexible repayment tenure of up to 7 years. ‘Loan amount depends on monthly income. {Loan applications can be submitted on-line. Processing/handling fee applicable to some of the personal lous safes who ned money tay in small amount and do not like Seana wd rome ; can opt for Al-Raln (Islamic pawn broking) thst inti at ant Ratot lari, Ban sla (M) Bhd, Bank Perania® ant EON Bank Ar-Rohn contat is a collateralized debt without inter Aber ower only requied pay storage fees on the pledged asse. TH” ised in this contract are normally gold jewelry for €x tings gold bacelesandnechiees are . fe gold 108 edCuern& Covans oer B, B3 (iv) (b) of ABM Rutes states thatthe interest on a ion Serttyshall be calculated using the simple interest formals personal oan shi nverest Amount (1) = Principal (P) x Time (7) x Rate (R) Where: p= Amount of loan outstanding atthe end ofthe previous month the month = Number of day’ in the mont TN 365 example 43: tne interest ona personal lan taken by Al it Ali orrowed RMY0,000 Gere of 5.99% fra period of one year ase: Fst we need fo caleulate the monthly instalment payment. Manual calculation: =Unlt +6) M1 +o 1] Where loan value = RM0,000 © the mothy interest ate = 0.0599/12 = 0.004992 "pet in months = 12 ‘= 0.004992(1+0.004992)"* = 0.004992( 1.004992)" 005299 ‘er -1 = (140,004090)2— 004992" ~ 06158 SoM soy 1) = 10,000(0.005299/0.06158) = RM860.51 ‘contd 107reson Fras Pe oR By accessing 10 an electronic nancial calomator OF ‘on-line personal loan calculator 0 a finance calculator = RM10,000 R= 5.99% T= 12 months Monthly paymentinstalment = RMB60.62 [Next isto calculate the interest amount and principal payment ‘Table 4.3: Caleltions of Interest and Principal Payment ~ Personal Loan Tipetaiment | interest | Principal | Ending Payment Amount ‘Payment Balance oa ™ | ae G) | WsQ)XAXT| GHGHA) — (6=(2H5)_ wow | 492 | 810.70 9.1600 _ae + a ‘ woe) 72 5 ecoee | et 6 | 5905e2 | 96062 29.48 (7 sores | econ | 2539 + fanaa [esos | 218 oonee | 1697 il 12.76 xR xT =P 0.0599 x 1/12 Fe ‘or example for Row 1: Interest 1M10,000 x 0,0599 x 1/12 M49. 92 Flow 2 Interest = RM3, 189.90 x 0.0599 x 1/12 Mas 87 108Cuor & Consen eon cor Loan « loans are taken by borrowers to finance the purchase of Lo sewed by the cars purchased. This is also ncn sahie AP) agreement where the agreement includes eting of pont ception purchase and an agreement forthe purchase of goo by with a ‘The hirer (Loan borrower) has possession of the goods and he ins jon to buy the goods. The ownership ofthe goods remains with ter Fr example a bank) until the loan is fully paid ‘The general guide line is the financing period limit: between 7 to 10 sean andthe maximum Toan is given up to 90% of the value ofthe car Jnerest charged is quoted on a monthly rest of flat basis. A flat rate or flat imerest ate is where a lender charges interest on the original loan over the eae loan period even though the principal outstanding is reducing ‘overtime [nother words, the lender charges interest to the value of purchase todetermine the total payments. Example 4: nok All borrowed RM1,000 to purchase a second hand car. A bank provided: aan, tobe repaid monthly over one year and the interest is 14% per annum, Interest amount = Principal (P) x Rate (R) x Time (T) =RIM1,000 x 0.14 x 1 = RM140 ‘Themanthiyinstalme (RM1,000 + M140) / 12 = RMS ‘Thsisasirlghtfoward oan @ 14% pa, However, the true annual rate orknown ‘ital percentage rate (APA) in this example is actualy 24,9085% per annum, W's aimost double the quoted rato. The interest rate of 14% used inthis Aen alatrate. APR should be stated in the HP agreement. The formula 's (Refer to the Seventh Schedule of HP Act 1967): ep. 2NF (3000 +N) VF o0c{n 9) 109Parson Fron ans ‘Where N__=Number of instalments © =Number of instalments that are under the contract which willbe ‘one year or, where the contract is to be completed in less than the number of instalments that would be paid in a year iti ‘continued to be paid at the same intervals. staan a F = the amount determined in accordance with the formula 1000 x T NA T =Total amount of predetermined term charges ‘Amount financed C =asstated above N- =as stated above Fe toxteea “yest.000 = 212.14(300%12 +1214) 26121214 + 300 12(12 +1) em) 4022 + 45800 26,048, 50,832, = 24 9065% APR = tigate refer to Table 4.4: Calculations of the Flat Rate interest which sus Teaizhedule that amorizes the loan, in realty, the interest each mont 5 , the i tothe month rate of 2.0757% per month, ext 110‘Toble 44: Calculations of Flat Rate Interest Interest | Principal Amount | Payment 1 IM20.76 | RM74.24 | 9500| 20757% | 1922, 7578/ (95.00 | 2.0757 1764) 77.36 500) 20757% | 1604, 78.96 eee 20757’ | 1440) 0060) 61305) 5909/2075 % | 1278, e227 50078) $—~s500] 2077% | 1102) 68.98/46 PL —s00] zorsrs | 927| 0573) stor] 4 +—gs00) 207e7% | _749| 97si] 27387 Fo 2o7s7% | 568) 99.2] 18424 fon 20767 % | 382) 91.18, __—98.07) (1 —Scol z0rs7% | 180) e007] 0.00) f Total RM140 | L Feran|slamic car loan, there are two (2) contracts involved. The contracts are th farahoontract leasing/renting) and the Bai contract (purchase). Acustomer ‘ies into the Jjaran contract and leases the car from the owner (bank) at art ‘greed rental over a specified period. Upon expiry of the lara contract, the ‘Ba contract will come into effect, which allows the hirer to purchase the car at ‘n agieed price. Vehicle financing is based on the Bai’ Bithaman Ajil (884) caniract method of sales. Example 4.5: Calculations on Islamic Car Loan a's Promteaenngpree = FM100,000 men prod = 5 years (60 months) coxa O88 ~Ruroooas Years = MQS,000 = RM100,000. =R Sit ts orEducation Loan nt investment one makes in life, wy you need {0 Pay the full cost of education. For fulltime stugeye Hoan helps Hanes porrower between the student and one co-borroye, Acer te repayment capacity. Students must Be 18 Yeas oid om "or pat time students, they must provide eat Acceptai, secrete ae pens, sblngs, Teltives OF goerdinns with an degay, styment capacity. Students must be 18 years old or above, int is RM10,000 and the maximum Iggy amount is RM100,000. There is as low as 30% security requirement iy the form of fixed deposit. The maximum loan tenure is 10 years. The loin covers parttime or full time studies; government (Ministry of Educaiy ‘and Public Services Department) approved courses (local and overseas) Whether at Diploma, Degree, Masters or PhD level. An education loans notonly to finance tuition fees but can include purchases of books, personal computers as well as hostel and living expenses. ‘The minimum loan amout In order to help Malaysians further their study at Public Higher Institutions of Learning/nstirur Pengajian Tinggi Awam (PTA) and Private Higher Institutions of Learning/Instirut Pengajian Tinggi Swasta (IPTS) Perhadanan Tabung Pendidikan Tinggi Nasional Malaysia (PTPTN) wis established in 1999. It is mainly focused on giving education loans 10 students who have gained admission to local universities but are unable to further their studies due to financial constraints. PTPTN will evaluate the financial background of the applicant's family bass approving the application, Those who are successful in getting the loans are required to subscribe insurance coverage. ‘The premium will ‘made on bebalf of the applicant. nine "study loan repayment willbe made in monthly instal The repayments ministration cost of 4% based on the reducing balance: cream ements will commence six (6) months after graduation or in be ‘uring acareer, whichever i earlier. The total amount of PTPTN 112squdy loan fora frst degree student studying a we Cones nay gum and for local [PTS is RMM6.000 per sano ® M6. 0000 pera ) ational Medical University (IMU) stents wil nergy will get R cn In Ime science STEAM SUMCHIS Will have an a 120.000 y 1 adaitiona rr repent oars not nelding administration go, Teeth Se per year ‘or the diploma level ta .000 per year is given Tor local PTA stuns guts and science Streams tudlents: applicable for beth, SUMMARY enon debt orconsumer debt is consumer ret whichis oustan terms. it is debt which is us Seniapisr ras ich is used to fund consumption rather “The most common form of consumer deb is the crit her consumer finances, which are often at higher interest such as mortgages. We need to buyon mmething we cannot afford macroeconomic than investment. card debt, and ot fates than long term secured loans. {reait in order to enable us to buy sor ‘The interest rate charge depends on a range of factors including ie economic cimate, perceived ability ofthe customer 0 repay. Compete pressures from other Tenders. and the inherent structs and security of rr credit product. The interest to be paid may be high 2nd if one is not ae fal one might just overspend. Constimer credit can help us achieve sar fnaneial goals but atthe same time if its not carefully planned it san also ruin us financially. | Ser Test QUESTIONS: 1. You received your eredit card statement recently ‘The statement as the following information: [Beginning balance Carethree Supermarket | Gattex Petaling Jaya Saga Service Center | Payment Ch27 | MAG Golden Hotdays 31 Gosing 413