Dr.

Norliza Che Yahya

Office: PFI 04 -032 Office (tel): 03-3258 7077
Email: norliza9911@uitm.edu.my

CHAPTER
4 FOUR
.

Consumer Credit

1
Semester March 2021
 Content of Syllabus

CODE CHAPTER WEEK

Ppt 1 Introduction 1-2
Ppt 2 Personal Financial Statement 2-5
Test 1
Ppt 3 Tax Planning 6-7
Ppt 4 Consumer Credit 8
Ppt 5 Risk Management and Life Insurance 9
Ppt 6 Investment Planning 10-11
Ppt 7 Retirement Planning 12 Test 2
Ppt 8 Estate Planning 13

2
 Chapter Outline

CONTENTS

To define consumer credit and analyze

1 its advantages and disadvantages

To differentiate among various types of

2
credit

3 To compute the credit cards charges

3
 Introduction to Consumer
Credit

4
 Introduction
01 02
• Consumer credit is an arrangement to • Consumer credit can also be
receive cash, goods or services now, defined as the control of money
but pay for them in the future and is a because it needs to be paid
power to buy and borrow on trust

03
04
• Usually, consumer credit is
needed for personal needs, • Consumer credit enables a
except for a home mortgage, person to expand its
by individuals and families consumption by increasing its
purchasing power

5
 Credit Capacity
Three ways consumers can finance their purchases:
• Draw on their savings
• Use present earnings
• Borrow against expected future income

Before a person could opt for credit facility, he or she has to evaluate his/her credit capacity

Debt Service Ratio is often used to find out if a person is

highly leveraged or in too much debt:
Compares one’s monthly income to his/her monthly fixed loans
Examples - housing loan, credit card, car loan

Debt to Income Ratio Debt to Equity Ratio

Monthly Fixed Loan Payment Total Liabilities

= =
Gross Monthly Income Net Worth

Rule: DSR < 30%, excluding house payment which is a long-term liability Rule: DER < 1, excluding home value
6
 Credit Bureau
Established under the Central Bank of Malaysia Act 1958 and 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
on-line system known as Central Credit Reference
Information System (CCRIS)
To facilitate these institutions to make
assessments and decisions on credit
applications, the financial institutions would
require up-to-date information and accurate
information on their prospective borrowers
Information in the credit report of
CCRIS could assist the financial
institutions to make informed decisions
on credit applications

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 Approving Credit Application
Banks will search for credit or debt history and information of the applicant through:
• Central Credit Reference Information System (CCRIS)
• Credit Tip-Off Service (CTOS)

CCRIS CTOS

• 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
synthesizes the information into credit reports, which can be made
available to the banks upon request
• Website: http://creditbureau.bnm.gov.my/ccris.html
• Malaysia's leading Credit Reporting Agency known by its 'credit lead'
information system
• An electronic ‘archive’ that provides individuals with personal credit
reports. The report provides information on:
- Examples - 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
• 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/

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 Sample of CCRIS Report

9
 Sample of CTOS Report

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 Applying for Consumer Credit
What A Bank Needs? The 5C’s

Condition
1 What economic conditions
could affect your ability to
repay the loan? Collateral
What property do you have to pledge
4
that the lender can repossess if you
Character default on the loan?
2 Do you pay bills on time?

Capital
5 What are your assets and net worth?
Capacity
3 Can you repay the loan?

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 Use vs Misuse of Consumer Credit
What if I use my savings for this
What are the opportunity costs of
purchase?
postponing this purchase?

Before you use credit for a

major purchase, ask
yourself some questions to
evaluate whether you are
really in need of the credit
facility:

Do this purchase fits my budget? Can I postpone this purchase?

Could I use the credit I’ll need in

some better ways?

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 Pros and Cons of Consumer Credit
Pros
• Permits purchase with limited
funds
• A cushion for financial
emergencies
• Convenient when shopping.
• Safer than cash
• Needed for hotel, car
reservations and online
shopping
• Able to take advantage of float
time or grace period
• Rebates, airline miles, or other
bonuses
• Indicates financial stability
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Cons
• Temptation to overspend and
use for unreasonable
purposes
• Failure to repay loan may lead
to loss of income and be
declared as bankrupt (in worst
case)
• It does not increase total
purchasing power
• Credit costs money
 Types of Consumer Credit
Consumer Credit

Closed-End Credit Open-End Credit

• Known as loans or installment loan for a specific purpose that is • Revolving credit that is used as needed until reaching line of
re-paid in a specified period of time, via scheduled equal credit max
amounts • Can pay up and re-borrow
• You have to pay interest and charges if the bill is not paid in full
• Examples - mortgage, automobile, education, furniture loans upon credit due

• Examples - credit cards, charge cards, overdraft

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 Credit Card (CC)
Credit card is offered to individual
Minimum payment is 5% out of the
1 by banks and credit card 5 outstanding bill
companies such as VISA and
MASTERCARD

Only individuals with yearly income No interest will be charged if full

2 of > RM 18,000 are eligible to apply
6 amount is paid when it is due

It allows us to make purchase If card holder pays part or full amount

without immediate cash payments. of the limit, the card holder can reutilize
3 7 the paid amount together with the
Card holder is given a revolving
financing limit balance not utilized

Banks calculate the amount

It does not require cardholders to outstanding and charged interest (min
4 pay the bill in full each month
8 of 1% per month) on the unpaid
amount  interest income for banks
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 Fraud Prevention on CC
Notify the card issuer if you don’t get
Check and sign the new card when
1 it is received
5 your billing statement, or if your card is
lost or stolen

Destroy the old card by cutting it to Don’t give your number over the phone
2 ensure that the chip and magnetic 6 unless you initiate the call, and don’t
stripe is totally damaged put it on postcards

Safeguard your personal

3 identification number (PIN) 7 Check credit report

When using the card, check receipt

Notify the bank for any changes in
4 after every transaction: compare 8 address
receipts to bills, check for errors
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 CC for Online Purchase Precautions
1 Use a secure browser 5 Keep personal information private

2 Keep records of online transactions 6 Shop at businesses you trust and

familiar with

Review monthly credit card Never give out your password to

3 statements 7
anyone online

Read policies of the websites you

4 visit concerning refunds, site 8 Don’t download files sent by strangers
security
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 Fees and Charges on CC
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 range from
RM 60 to RM 600)
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
18
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
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 CC Interest
Illustration:
You have received your credit card statement for the period beginning 15th September to
14th October 2020. The details of the statement are as follows:

Date Details Amount

Sept 15 Opening balance RM 2,300

Sept 25 Speedmart 69 RM 450
Sept 28 Fuel (Petronas) RM 110
Oct 03 Flight ticket RM 690
Oct 08 Payment RM 1,000
Oct 12 Pharmacy Norliza RM 300
Oct 13 Jakel Boutique RM 150

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 Computation of CC Interest
Solution:
Average daily balance including current purchase
Period No. of Balance (RM) Aggregate
(1) days (2) (3) balance (RM)
(4)=(2)(3)

Sept 15 - 24 10 2,300 23,000

25 - 27 3 2,300 + 450 = 2,750 8,250
28 - 02 5 2,750 + 110 = 2,860 14,300
Oct 03 - 07 5 2,860 + 690 = 3,550 17,750
08 - 11 4 3,550 – 1,000 = 2,550 10,200
12 - 12 1 2,550 + 300 = 2,850 2,850
13 - 14 2 2,850 + 150 = 3,000 6,000
30 82,350
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 Computation of CC Interest
Solution:
Average daily balance including current purchase (cont’d)

Steps Equations Calculations

RM 82,350
aggregate balance =
1. Average Daily 30
Balance no. of days
= RM 2,745
= 1.5% x RM 2,745
2. Interest Amount monthly interest rate x average daily balance
= RM 41.18
= RM 3,000 + RM 41.18
3. Outstanding
Balance
ending balance + interest amount
= RM 3,041.18
= 5% x RM 3,041.18
4. Minimum
Payment
minimum payment rate x outstanding balance
= RM 152.06
5. Outstanding = RM3,041.18 − RM 152.06
balance after outstanding balance − minimum payment
21 minimum payment = RM 2,889.12
 Computation of CC Interest
Solution:
Average daily balance excluding current purchase

Period No. of Balance (RM) Aggregate

(1) Days (3) Balance (RM)
(2) (4)=(2)(3)

Sept 15 - 07 23 2,300 52,900

Oct 08 - 14 7 2,300 – 1,000 =1,300 9,100
30 62,000

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 Computation of CC Interest
Solution:
Average daily balance excluding current purchase (cont’d)

Steps Equations Calculation

RM62,000
aggregate balance =
1. Average Daily 30
Balance no. of days
= RM 2,066.67
= 1.5% x RM 2,066.67
2. Interest Amount monthly interest rate x average daily balance
= RM 31
= RM 1,300 + RM 31
3. Outstanding
Balance
ending balance + interest amount
= RM 1,331
= 5% x RM 1,331
4. Minimum
Payment
minimum payment rate x outstanding balance
= RM 66.55
5. Outstanding = RM1,331 − RM 66.55
balance after outstanding balance − minimum payment
23 minimum payment = RM 1,264.45
 Computation of CC Interest
Solution:
Other Methods

Methods Equations Calculation

= 1.5% x RM 2,300
Previous Balance
Method
monthly interest rate x beginning balance
= RM 34.50
= 1.5% x (RM 2,300 − RM 1,000)
Adjusted Balance monthly interest rate x (beginning balance payments
Method − payment) = RM 19.50
Note: This method calculates the interest amount

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 Charge Card
A credit facility offered to individual without any specified credit
limit; for purchase without the use of immediate cash

The holder must pay the Allows the holder to The non-payment of the
amount outstanding in full make full payment within credit for 2 months will
when due 10 – 12 days after the lead to suspension of the
billing date facility

Examples:
• AMEX
• Diners Club
• HSBC Amanah Mastercard

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 Overdraft/Revolving Credit Lines
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
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A person may need Overdraft facility is short
overdraft facility to meet term in nature
urgent needs.
Examples - medical
purposes, to pay all high
interest credit bills,
immediate down payment
for home loan
 Computation of Overdraft Interest
Interest for overdraft facility is using simple interest formula

A 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

Methods Equations Calculation

• P = overdrawn balance at the end of each
day
Interest Amount = Princinpal 𝐏 x Time 𝐓 x Rate (𝐑) • T = n/365
• R = interest rate charged for overdraft facility
• X1 = Actual interest paid for the month
• X2 = Interest payable at full utilization of
X2 − X1 Y overdraft
Commitment Fee =
R • R = Interest rate charged for overdraft facility
• Y = Commitment fee for unutilized portion of
overdraft in % per annum

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 Consumer Loans
Also known as installment credits;

It is call amortization, meaning

A fixed term loan which require that the borrower will pay the
borrowers to repay to loan principal and the interest over
amount on an installment basis stated number of periods or
installments

Main types of consumer loans:

• Personal loan
• Education loan
• Hire purchase (Car loan)
• Housing loan
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 Personal Loan
The eligibility for an individual to
Bank provides consumer credit in apply for personal loan is that he/she
1 the form of personal loan
4 should have at least fix salaries for at
least for the past 6 months

Interest charged for personal loan is

It is given to individual to finance
2 their general expenditures 5 higher than other types of loan and
quoted on monthly basis or flat basis

The amount given depends on the

purpose of the loan and collateral Examples - To renovate the house, get
3 pledged, usually will be in the range 6 married, holiday or purchase shares
of RM 5,000 to RM 100,000

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 Computation of Personal Loan
Type Equations Notes

L{c 1 + c n } • L = amount borrowed

Monthly Installment = • c = monthly interest rate
{ 1 + c n −1} • n = period in months

Case: En. Ahmad borrows an amount of RM 50,000 from Maybank with interest rate 4% per annum for a
period of 10 years. Calculate monthly installment that he has to pay.

Steps Calculations
Solutions:
1. Amount Borrowed RM 50,000
1. c (1 + c)n = 0.0033 (1+0.0033)120 = 0.0033
0.04 (1.0033)120 = 0.0033 (1.4849) = 0.0049
2. Monthly Interest =
Rate 12
= 0.0033 2. (1+c)n -1 = (1+0.0033)120 -1 = 1.0033120 -1
= 1.4849 -1 = 0.4849
= 12 x 10
3. Period in Months
= 120 months 3. Monthly Installment = RM50,000 (0.0049/0.4849)
= RM505.26
4. Interest Charged = 4% per annum for a period of 10 years
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 Computation of Housing Loan
Case: En. Rahman buys a house of RM 250,000 with down payment of 10%. He borrow from a bank the
difference of RM 225,000. 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 variables in the financial calculator

Functions Value

PV = RM 225,000

= 20 x 12 months
N
= 240 months
8%
i
=
12 months
= 0.0067

Monthly Payment: RM 1,882 (rounded off to the nearest Ringgit)

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 Car Loan
The purpose of car loan is to offer a
facility or service for an individual to
1 4
finance the purchase of new or
used car
Under hire purchase agreement
(HPA), the hirer (loan borrower) has
2 possession of the goods and he has
the option to buy the good.
Examples, type and color of the car
The car financing will usually be
within 5 to 9 years
The borrower needs to pay down
payment of the purchased car by cash
5 and borrow the difference (Usually,
loan amount is up to 90% of the car
value)

The ownership remains with the

Borrower will pay interest and principal
3 owner (bank) until the loan is fully 6 in fixed monthly installments
repaid

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 Computation of Car Loan
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.

Steps Value

1. Car Cost RM 70,000

= 10% x RM 70,000
2. Down Payment
= RM 7,000

3. Amount Borrowed = RM 63,000

Financial Calculator:
= 4% per annum for 9 years Pxtxi
4. Interest Amount
= RM 22,680
5. Amount Borrowed = RM 63,000 + RM 22,680
+ Interest Amount = RM 85,680
RM 85,680
6. Monthly Installment
=
108 months
= RM 793.33
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 Education Loan

Education loan is meant for student

1 who wants to pursue their studies In order to help Malaysian to further
at higher level study at public higher institutions as
well private higher institutions,
3 Perbadanan Tabung Pendidikan
Tinggi Nasional Malaysia (PTPTN)
The loan is used to finance tuition was established in 1999
2 fees and purchase of books

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 THANK YOU !


Dr. Norliza Che Yahya,
FIN 533

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