CHAPTER-4_CONSUMER-CREDIT-2020.pdf

use get in credit e thing advance Hutang - consumer credit by: puan zaibedah zaharum definition What is Consumer Credit? ➢Is an agreement to receive cash, goods or services now BUT pay for them in the future. ➢Is a power to buy and borrow on trust. ➢Can also defined as the control of money b...

use get in credit e thing advance Hutang - consumer credit by: puan zaibedah zaharum definition What is Consumer Credit? ➢Is an agreement to receive cash, goods or services now BUT pay for them in the future. ➢Is a power to buy and borrow on trust. ➢Can also defined as the control of money because it needs to be paid. ❑Usually consumer credit is needed for personal needs, except for a home mortgage by individuals and families. ❑Consumer credit enable a person to expand its consumption by increasing its purchasing power lifeline - terlalu kebergantungan . credit capacity Three ways consumer can finance their purchase: i. Draw on their savings. ii. Use present earnings iii. Borrow against expected future income ❑Before a person could opt for credit facility, he/she has to evaluate his/her credit capacity. ❑Debt Service Ratio (DSR) often used to find out is a person is highly leveraged or in too much debt. ❑DSR compares one’s monthly income to his/her monthly fixed loans. (e.g. housing loans, credit card, car loan). credit bureau ➢Credit Bureau in Malaysia is established under the Central Bank of Malaysian Act 1958. It has been in operation since 1982. ➢Credit Bureau collects credit information on borrowers from lending institutions and furnishes the information in the form of credit report via an online system known as Central Credit Reference Information System (CCRIS). ➢To facilitate these institutions to make assessment and decisions on credit applications, the financial institutions would require up-to-date and accurate information on their prospective borrowers. ➢Therefore, the information in the credit report of CCRIS could assist the financial institutions to make informed decisions on credit applications. ccris and ctos For banks to approve a credit application, they will search for credit or debt history and information of the application through: ❖Credit Tip-Off Service (CTOS) Credit Central Reference Information System (CCRIS): ▪It is a system that stores and contains credit information and history of million borrowers in Malaysia. ▪CCRIS automatically processes the credit data received from banks and synthesises the information into credit reports, which can be made available to the banks upon request. ▪Website: http://creditbureau.bnm.gov.my/ccris.html sample of ccris report ccris and ctos Credit Tip-Off Service (CTOS): ▪Is a Malaysia's leading Credit Reporting Agency known by its 'credit lead' information system. ▪Is an electronic ‘archive’ that provides individuals with personal credit reports. The report provides information on e.g., bankruptcy and summons. ▪Information in CTOS is collated from gazettes, newspapers, court notices, and searches at the relevant statutory bodies. ▪Financial institutions often verify your credit history with credit reporting agencies like CTOS before approving your loan and credit applications. ▪Due to this, it is important to ensure your CTOS report is clear. This is the first piece of advice given to anyone because it is so important to understand how you appear to creditors, while ensuring that your report is accurate. ▪Website: http://www.ctoscredit.com.my/ what creditors look for? use versus misuses of consumer credit Before you use credit for a major purchase, ask yourself some questions to evaluate whether you are really in need of the credit facility: ➢What if I use my savings for this purchase? ➢Does this purchase fit my budget? ➢Could I use the credit I’ll need in some better way? ➢Can I postpone this purchase? ➢What are the opportunity costs of postponing this purchase? pros and cons of consumer credit types of consumer credit CREDIT CARD CHARGE CARD RETAIL CHARGE CARD OVERDRAFT/REVOLVING CREDIT LINES types of open ended credit credit card ❑Credit card is offered to individual by banks and credit card companies such as VISA and MASTERCARD. ❑Only individuals with yearly income of > RM 18,000 are eligible to apply. ❑It allows us to make purchase without immediate cash payments. Card holder is given a revolving financing limit. ❑It does not require cardholders to pay the bill in full each month. ❑Minimum payment is 5% out of the outstanding bill. ❑No interest will be charged if full amount is paid when it is due. ❑If card holder pays part or full amount of the limit, the card holder can reutilize the paid amount together with the balance not utilized. ❑Banks calculate the amount outstanding and charged interest (min of 1% per month) on the unpaid amount = interest income for banks. fraud prevention on credit card ❖Check and sign the new card when it is received. ❖Destroy the old cut by cutting it to ensure that the chip and magnetic stripe is totally damaged. ❖Safeguard your personal identification number (PIN). ❖When using the card, check receipt after every transaction: compare receipts to bills, checking for errors. ❖Notify the card issuer if you don’t get your billing statement, or if your card is lost or stolen. ❖Don’t give your number over the phone unless you initiate the call, and don’t put it on postcards. ❖Check credit report. ❖Notify the bank for any changes in address. precautions on credit card for online purchase There are various pre-cautions need to be considered when purchasing goods online: ❖Use a secure browser. ❖Keep records of online transactions. ❖Review monthly credit card statements. ❖Read policies of the websites you visit concerning refunds, site security. ❖Keep personal information private. ❖Shop at businesses you know and trust. ❖Never give out your password to anyone online. ❖Don’t download files sent by strangers. fees and charges on credit card 1. Annual fee ➢ Annual fee is charged to offsets costs that issuers incur in maintaining accounts. ➢ The amount of annual fees depends on type of credit cards (normally ranges from RM 60 to RM 600). 2. Interest charge ➢ Interest charged is charged based on outstanding balance, according to the guideline of BNM. It is usually 1.5% per month or 18% per annum. 3. Late payment charge ➢ Is imposed if cardholders failed to pay the minimum payment when due. ➢ Minimum payment varies between 2% to 5% per month based on outstanding balance. 4. Charges on cash advance ➢ If cash is needed urgently, cardholders can get a cash advance from bank branches (via counter) or through automated teller machines (ATM). ➢ The interest is usually higher (3% per month) than those charged on unpaid balances. computation of interest on credit card There are four methods in calculating interest on credit card: 1. 2. 3. 4. Average daily balance including current purchase. Average daily balance excluding current purchase. Previous balance. Adjusted balance. Example: You want to know i) the Average Daily Balance, ii) how much interest amount has to be paid, iii) amount of outstanding balance, iv) the minimum payment and v) the outstanding balance after the minimum payment. Lets say the interest rate is 18% per annum and minimum payment is 5%. Therefore, you have to compute: i. ii. iii. iv. v. Average daily balance Interest amount Outstanding balance Minimum payment Outstanding balance after minimum payment computation of interest on credit card: illustration You have received your credit card statement for the period beginning 15th September to 14th October 2015. The details of the statement are as follows: computation of interest on credit card: solution average daily balance including current purchase 1. average daily balance including current purchase average daily balance excluding current purchase 2. average daily balance excluding current purchase computation of interest on credit card: solution 3. Previous Balance Method Interest amount = monthly interest rate x beginning balance = 1.5% (RM2,300) = RM34.50 4. Adjusted Balance Method Interest amount = (monthly interest rate) (beginning balance payments – payment) = 1.5% (RM2,300 – RM1,000) = RM19.50 charge card Charge card is a credit facility offered to individual without any specified credit limit; for purchases without the use of immediate cash. The main features: ❖Quite similar to credit card but for charge card, the holder must pay the amount outstanding in full when due. ❖Charge card allows the holder to make full payment within 10 – 12 days after the billing date. ❖The non-payment of the credit for 2 months will lead to suspension of the facility. ❖Examples: AMEX, Diners Club, HSBC Amanah Mastercard credit card versus charge card retail charge card ➢Typically a retailer — such as a department store, gas retailer or airline– will partner with a bank or card network such as Visa, MasterCard, Discover or American Express. ➢Cardholders may get merchandise discounts or rewards points when they buy from the sponsoring merchant. Some cards are co-branded, which allows cardholders to use the cards at any other retailer that takes cards from the bank or card network. overdraft/revolving credit lines ➢Overdraft is a facility provided by banks that is associated with a current account. It is where a customer is allowed to withdraw money from current account which has insufficient funds or balance. ➢The holder must get approval from bank in order to overdraw his account. Upon approval, banks will provide a specific amount of financing to the holder. A certain credit limit will be set by bank to the holder. ➢A person may need overdraft facility to meet urgent needs (e.g., medical purposes, to pay all high interest credit bills, immediate down payment for home loan). ➢If the account is overdrawn, daily interest will be charged on the outstanding balance. If one fails to fully utilize the amount allowed to be overdrawn, commitment fee is charged on the unutilized portion of the overdraft facility with the exception of personal overdraft facilities with a limit up to RM 250,000 in total. ➢Overdraft facility is short term in nature. types of closed end credits / loans consumer loans ➢It is also known as installments credits. ➢It is a fixed term loan which require borrowers to repay to loan amount on an installment basis. ➢It is call amortization, meaning that the borrower will pay the principal and the interest over stated number of periods or installments. ➢The main type of consumer loans are: 1. 2. 3. 4. Personal loan Education loan Hire purchase (Car loan) Housing loan personal loan ➢Bank provides consumer credit in the form of personal loan. ➢It is given to individual to finance their general expenditures. ➢The amount given depends on the purpose of the loan and collateral pledged, usually will be in the range of RM 5,000 to RM 100,000. ➢The eligibility for an individual to apply for personal loan is that he/she should have at least fix salaries for at least for the past 6 months. ➢Interest charged for personal loan is higher than other types of loan and quoted on monthly basis or flat basis. ➢For examples: to renovate the house/ get married / holiday/ purchase shares. housing loan ➢A home mortgage is a loan given by a bank, mortgage company or other financial institution for the purchase of a residence—either a primary residence, a secondary residence, or an investment residence—in contrast to a piece of commercial or industrial property. ➢In a home mortgage, the owner of the property (the borrower) transfers the title to the lender on the condition that the title will be transferred back to the owner once the final loan payment has been made and other terms of the mortgage have been met. housing loan Case: En. Rahman buys a house of RM250,000 with down payment of 10%. He borrow from a bank the difference of RM225,000. Tenure of his loan is 20 years using monthly rest at an interest rate of 8% per annum. Calculate monthly payment of the loan that he has to pay. Solution: Input the following known variables in the financial calculator PV = RM 225,000 N = 20 x 12 months = 240 months i = 8% / 12 months Solve for payment (end mode). The payment is RM1,882 (rounded to the nearest ringgit). car loan (hire purchase) ➢The purpose of car loan is to offer a facility or service for an individual to finance the purchase of new or used car. ➢Under hire purchase agreement (HPA), the hirer (loan borrower) has possession of the goods (i.e., car) and he has the option to buy the good (e.g., type and color the car). ➢However, the ownership remains with the owner (bank) until the loan is fully repaid. ➢The car financing will usually be within 5 to 9 years. ➢The borrower need to pay down payment of the purchased car by cash and borrow the difference (Usually, loan amount will up to 90% of the car value). ➢Borrower will pay interest and principal in fixed monthly installments. car loan (hire purchase): illustration Case: En. Ahmad buys a car for an amount of RM 70,000 and applied for financing from Maybank with interest rate 4% per annum for a period of 9 years. He paid a down payment of 10%. Maybank approved 90% loan of the total car cost (RM 63,000). Calculate the monthly installment that En. Ahmad has to pay. Solution: Car cost = RM70,000 Down payment (10% x RM70,000) = RM7000 Amount borrowed = RM 63,000. Interest charged is 4% per annum for 9 years = RM22,680 = P x t x i Amount borrowed + interest = RM85,680 Monthly installment = RM85,680 / 108 months = RM 793.33 education loans ➢Education loan is meant for student who wants to pursue their studies at higher level. ➢The loan is used to finance tuition fees and purchase of books. ➢In order to help Malaysian to further study at public higher institutions as well private higher institutions, Perbadanan Tabung Pendidikan Tinggi Nasional Malaysia (PTPTN) was established in 1999. - thank you -