The basics of borrowing money and managing your debts
You may be tempted to spend more money than you have because of the availability of loans and credit cards offered by financial institutions.
These institutions offer you money and credit or loans so you can buy a house, a car, pay your bills or go on a holiday.
It is crucial to keep in mind that this money is not free. You have to pay it back – with interest!
Before borrowing money, make sure you can manage the debts. Remember that you want to own more than you owe. You want to build wealth.
If you borrow money, you should use it for productive purposes. Try not to pay for things that will not create value for you. Also, never use shortterm loans, such as credit cards or overdrafts, to fund long-term assets like houses. Loans and Credit
When you want to take a loan or use a credit card, ask yourself these questions: Is the product or service you want to buy important? Is it necessary? If it is important and you need to have it, can you afford to pay the instalments?
If it is a substantial purchase, such as a car or house, can you afford to put down a larger down payment? If it is something you desire, can you control the feeling and delay your decision to buy it since it is not that important?
If you decide to take a loan or use your credit card to buy something, have you worked out your cash flow to see if you are able to repay the loan or credit card debt?
Do you know the costs of borrowing and using your credit card? There are interest and finance charges as well as late payment fees.
Do you understand the consequences of failing to repay money you borrow? If you fail to do so, legal proceedings can be taken against you. You can even be made a bankrupt.
Unless you are able to increase your income, you need to give up something to make your monthly loan payment.
Are you prepared to make this trade-off ? For example, can you give up spending on your weekly entertainment to make payments on your loan and credit card debt?
No matter how careful you have worked out your monthly cash flow to repay your loan or credit card debt, something unexpected or an emergency can happen and you will need extra cash. Are you still able to meet your commitments if such a thing happens?
Hence, it is important not to overcommit on loans and purchases using credit card. As a general rule, your total monthly payments on all your loans and credit card debt should not exceed 40 per cent of your net monthly salary -- after statutory deductions such as tax, EPF and SOCSO. Licensed and unlicensed parties
There are various types of financial institutions in Malaysia. Most people would usually use products and services of commercial banks in their daily transactions. Commercial banks are licensed by BNM to provide financial products and services to the public. (For a listing of licensed financial institutions, go to BNM’s website at www. bnm.gov.my).
There are money lenders licensed by the Ministry of Urban Wellbeing, Housing and Local Government that provide loans to the public.
However, unlike licensed financial institutions, they cannot accept deposits and their loan interest rates are normally higher than that of licensed financial institutions.
There are also unlicensed money lenders, commonly referred to as loan sharks. Their operations are illegal.
They charge very high interest rates and often use threats and violence on people who cannot pay back their loans.
Never, ever borrow money from a loan shark because you will:
1. Get a loan on very strict terms and conditions
2. Have to pay a very high rate of interest with daily compounding effect
3. Open yourself and your family to harassment if you get behind on your payments
4. Be pressured into borrowing more from loan sharks to repay one debt after another.
The Credit Counselling and Debt Management Agency (AKPK) is an agency under Bank Negara Malaysia tasked to help individuals take control of their financial situation. For assistance, please contact AKPK’s Power Infoline at 0326167766 or visit www.akpk. org.my.