With rich people showing off their wealth, the normal people are caught up in a snare to catch up with them. Have you seen the MLM people persuading others to join then by displaying photos of big cars, big houses, or jewelries , as the bait to lure people in. It may be able to fool people, it may also may not be that effective, but there is one thing for sure.
Normal people who are not rich, has embraced a new religion, they don’t realize it but they are overwhelmingly influenced by the media. They start thinking that owning big cars and houses, wearing extravagant dresses are must, they start to judge people based on that.
This desire has encroached into their children, where schoolmate pressure for the same expensive things put heavy burden to parents’ budget. Parents themselves are the slave of these showing off kind of thinking.
How do people afford these expenditure ? Debt. People borrow personal loan and spend endlessly using credit cards. Credit cards allow them to spend 10 times more than their salary, and the minimum payment every month is 5% of total debt only. The problem is they spend on the temporary or consumer items like expensive dress, eating too much,
Therefore, wastage of money and unlimited borrowing must be stopped.
Debt has many colours according to the benefit or disadvantages.
Green debt = Use to buy good investment
Red debt = Use to buy excessive food, dresses, and other consumer items
Brown = Debt to buy real estate / properties aka mortgage debt
Yellow debt = Money you lent to your friends and family members that can hardly be collected
Grey debt = Debt of other persons that you become guarantor,
Only green and brown debt are good ones, the rest must be avoided or minimized.
Debt or credit has function. It is impossible to buy house or cars without loan.
But monthly installment will hurt you as they come from your pay. Thus, buying cheaper items ease you more in daily life.
It is a rule of thumb where, paying debt or loan, the total debt payment must only about 1/3 of your salary.
Revolving Credit
Credit card is a revolving credit. Many personal loan is also a revolving credit. Usually, the outstanding is charged with interest on monthly basis. Say, if they say the interest is 12%, usually the interest is divided into 12 months which is 1% per month. At the end of the month, the amount you have not paid will be charged 1%.
However, the interest is not actually 1%. It is much more than that because of compounding effect. This is often not disclosed. Say, 1% per month on outstanding, by next month your outstanding will be not only the actual outstanding but plus interest. The next month, 1% will be charged on outstanding and interest.
In calculation, it is 1.01 times 1.01. So, in 1 year you get 1.1278. That means in actuality you pay 12.78% , not 12%. The percentage keeps growing year after year, and after years, it can go up to 60%.
Amanah Saham Bumiputera (ASB) loan uses this calculation as well.
When we are promoted with loans by banks’ salesmen, they only tell us the yearly interest and installment per month. For example, 9% interest and RM120 per month. The RM per month is just what they suggest us to pay every month. The interest goes on. Actually you can pay more or lower than that.
If the loan is with collateral like ASB or house, if you do not pay by 2 installments, they take your collateral. If loan without collateral, you can pay more or less. Regardless, interest is still calculated on what you have not paid.
Although they tell you the interest is say 9%, but you are never told how it is calculated. How they calculate ? If it is charged every month like I explain above, it is called “monthly rest”, the interest grows every month. If it is charged everyday, it is called “daily rest”, it grows faster at daily basis. When it grows faster, it is a lot more expensive.
The bank staffs will never tell you this. Even you are knowledgeable and ask about it, they often cannot answer, or they just answer, when the time comes, computer will do the math. Well, sales officers come and go from the bank. They got the job there, they got a little training (or usually no training), they are asked to sell products, can’t reach the sales target, they are kicked out, they feel pressurized, they quit.
So, you are the one who must plan beforehand before you go for a loan.
Hire Purchases
Hire purchase or sewa beli is the type of loan when you buy car. Unlike land, value of cars go down definitely. So, they’d rather fixed the interest. It is called simple interest rate. If the interest is 5%, you loan RM10,000, the interest per year is RM500. If you loan for 9 years, total interest is RM4,500. So, principal RM10,000 plus interest RM4,500 is RM14,500, you pay early or not, you still pay RM14,500. RM14,500 will be apportioned into 9 years, you will get the monthly installment. This is if the interest rate is 5%. But usually for 5%, they will not tell everyone it is 5%.
They will like to confuse things. They use so called Annualized Percentage rate, it was so confusing that I cannot present the calculation here. Unless you are math expert or so , like me, I don’t think you can understand it.
Banks employ the rule 78 (as per Akta Sewa Beli) by which most of the interest is charged upfront and so the rebate on early payment is much lower than otherwise it would be. This makes it not profitable to settle the loan at later stage.
In short, even for so called simple interest rate, the calculation is actually not like that, it is definitely so confusing that only the banks know how to calculate.
Well, mortgage for home is as confusing but you get advantage for settling it early. In Malaysia, we fail to implement the mortgage based car loan because banks find it risky and unprofitable for them. So, the banks lobbied Bank Negara for the present Hire Purchase method.
Filed under: Debt / Loan, Financial Planning
