Archive - 5 July 2013

Just like Haley Joel Osment saw dead people everywhere; you’re probably seeing debtors everywhere: And a lot of them. On July 3, 2013, the New Straits Times reported that Malaysian household debt had ballooned to 86% against our gross domestic product. There’s no escaping the nightmarish reality: We are a nation of consumers in debt. Neighbouring Singapore came in second at 74%; Hong Kong at 61% and Thailand faring the best at only 25.3%. Not only is such a ratio dangerous to the economy of the country but an alarming indicator of the level of debt many Malaysians are in.

In a Malaysian Insider article in May, Credit Counselling and Debt Management Agency (CCDMA) Chief Executive Officer, Koid Swee Lian, blamed poor financial planning and the inability to live within one’s means as the top reasons Malaysians found themselves in debt.

Source for statistics: Credit Counselling and Debt Management Agency (AKPK)

The ease with which civil servants are afforded loans despite having low salaries is another common cause of rising debt as reported by the Malay Mail Online on July 2. Some debtors are coughing up nearly 80% of their salary for the servicing of loans and credit cards with little leftover for their everyday needs. This perpetuates the cycle of debt as the shortfall in available sums is regularly remedied by turning to credit cards.

The statistics are even more alarming when one considers that the numbers do not include informal modes of borrowing such as independent moneylenders and pawnshops.

Not just statistics

Behind the numbers reported lie real people with many differing stories. “I can never save. My monthly car repayments are at RM1000, my credit card balances have reached nearly RM20,000 and I’ve borrowed money from my friends – many of which I haven’t repaid. I admit; it’s just me – I find it hard to say no to a night out. Before I know it; I’ve blown RM300 on dinner and drinks per outing. I can’t afford the downpayment for a house anytime soon.” confesses IT executive, Jay*.

But not everyone is in a hock due to lavish lifestyles. “I have two elderly parents, both with serious illnesses. My father needs regular dialysis sessions and my mother; medication for her arthritis. Every regular visit to the doctor costs me a minimum of RM200. If there are complications due to my father’s diabetes; the bill escalates. Add this to the fact that they both are no longer able to work and my income is the only one that pays the rent, utilities and food bills. I have zero savings and am up to ears in debt from credit cards and personal loans. I don’t know what I will do if I ever lose my job.” Says finance administrator, Simon.

The situations are all different but the outcome is the same. Cash strapped citizens resort to borrowing and the debt level continues to rise.

Where there is a will...

Debt isn’t the cloud you’d want hanging over you. If for whatever reason you’ve found yourself in such a predicament; there is a way to ease the burden. Amin knows all too well the feeling of debt and the final liberation which came some lucky financial management. “I bought an RM400,000 house when I only raked in a salary of RM3150 (approximately RM2800 after EPF deductions). The monthly repayments were a staggering RM1900. Add this to my car loan of RM480 per month and I was drowning even before I factored monthly living expenses. My credit cards were maxed out every month to help pay for many necessities. My lowest moment came when I didn’t even have enough to take a ride on the LRT.”

Amin’s monthly repayments were staggering and this left him with little available income to pay for necessities which ended up charged to his credit card. Luckily for Amin, the market value of his house increased and he was able to refinance for a higher amount. He used to extra cash to pay off his credit cards and other loans; consolidating all his debt into a single payment with a lower interest. This freed up cash for everyday needs and he has not looked back.

Debt does not have to be unmanageable. There are ways to regain control.

Debt consolidation

Paying off many different loans a month with differing interest rates reduces the amount of available income you have to meet your monthly needs. As many turn to credit cards to remedy the shortfall; this creates a cycle of debt that is hard to escape.

One way to break the cycle would be to consolidate debts into one slightly larger payment for all outstanding debt. Tenures may be longer but the extra disposable income per month reduces the need to turn to debt once again.

Depending on the total amount you have owing and the availability of assets; you could refinance a home as Amin did for a higher amount, using the extra to pay off your other debts. Home loan interest rates can stretch up to 40 years (although it is not advisable to take the longest tenure possible unless you haven’t an option) and offer interest rates as low as 4.20%.

If you do not have assets with which to leverage in refinancing: you could opt for a lower interest personal loan. Unsecured personal loan rates start as low as 6.5% and select banks offer low interest loans specifically for refinancing other personal loans and credit cards.

Balance transfers

Bank Negara’s Financial Stability and Payment Systems Report 2012 reported that 51% of credit card holders carry revolving balances. If you’re one of those affected mainly by credit card debt; balance transfers could save you money on your monthly interest and allow you to focus more money on repaying the debt. With a balance of RM10000 and usual credit card interest rates of 18%; a 6 month 0% balance transfer (assuming you repay only the 5% minimum amount every month) could save you RM825 in interest.

Repayment negotiations

If your situation is dire and the above recommendations are not an option to you; consider turning to the Credit Counselling and Debt Management Agency (AKPK). AKPK will start by studying your financial position and then provide you with advice on saving and financial management. If necessary, the agency will require that you surrender your credit cards and agree to them monitoring your payments. Should it be necessary; AKPK will negotiate with financial institutions to consolidate or reorganise your debt to ensure the payments are affordable to you.

AKPK has had much success in helping people mired in debt and will be able to customise remedial action to suit your situation and finances.

Lifestyle changes

Making small changes to your lifestyle will go a long way when dealing with debt. No matter which of the options above you chose; an alteration of usual spending habits will have to change in order to sustain a clean financial slate. Basic rules apply:

• Do not carry credit card balances where possible. If you have used your credit card for a large amount; repay the amount before using your card again. Similarly, do not use a credit card with a transferred balance until you have paid off the transferred amount.
• Do not take out loans unless you are sure you will be able to meet your collective repayments with ease.
• Automate savings at the beginning of each month.
• Some amount of debt is necessary. Few of us have the money to pay for cars and houses with cash. But even when applying for necessary credit; ensure that you will be able to pay your instalments as planned.

Getting out of bad debt (and staying that way) is not impossible and with a few choice changes, you will be on top of your financial game.

*Names changed to protect privacy.