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CHAPTER 4 : CONSUMER CREDIT - Coggle Diagram
CHAPTER 4 : CONSUMER CREDIT
Introduction to Consumer Credit
Definition: Using credit for personal needs (not home mortgage).
How Purchases Are Financed:
Savings
Current income
Borrowing future income
Advantages:
Immediate use of goods/services
Financial cushion
Safer than cash, rebates, bonuses
One monthly payment
Disadvantages:
Temptation to overspend
Failure to repay → loss of income
Credit costs money
Types of Credit
Closed-End: One-time loans (mortgage, auto, installment).
Open-End: (Credit cards, lines of credit)
Credit Cards (users, features, Malaysia stats)
Fraud Protection:
(Sign & secure cards, shred info, verify bills, report loss)
Online Safety
Travel & entertainment cards (full monthly payment)
Home equity loans / mortgage refinancing (Malaysia alternative)
Measuring Credit Capacity
Building Credit: Borrow within capacity, honor contracts, check reports
Credit Reporting Law (Malaysia CRAA 2010): Rights to access, correct, dispute, privacy
Credit Bureaus:
CCRIS (Bank Negara)
CTOS (Private)
Rules:
Debt Payments-to-Income: ≤20% of net income
Debt-to-Equity Ratio: <1
Co-signing Risks: You may be fully liable, May lose collateral, credit rating
Complaints & Protection
Laws (Malaysia):
CRAA 2010 – credit info rights
Financial Services Act 2013 – responsible lending
Islamic Financial Services Act 2013 – Islamic finance consumer protection
Consumer Protection Act 1999 – unfair practices
Applying for Credit (5Cs)
Character (payment history)
Capacity (ability to repay)
Capital (net worth)
Collateral (pledged assets)
Conditions (economic factors)
Avoiding & Correcting Mistakes
Avoid: Pay on time, don’t max out, review reports, keep old accounts active
Correct: Dispute errors, confirm corrections, improve habits
If Identity Stolen:
Flag fraud alerts
Contact creditors
File police report
Sources of Consumer Credit
Loan Types:
Inexpensive: family, asset-backed
Medium-priced: banks, credit unions
Expensive: finance companies, retailers, cash advances
Cost of Credit
Finance Charge: Total cost (interest + fees)
APR: Annual percentage rate (compare offers)
Malaysia Interest Framework:
From BLR → BR → SBR (standardized base rate)
SBR linked to OPR (simpler, transparent)
Loan Comparison:
Check Effective Lending Rate (ELR)
Understand spread above SBR
Trade-Offs:
Longer term → lower monthly payment but more interest
Reduce lender risk → lower rates (collateral, larger down payment)
Calculating Interest
Simple Interest: I = P × r × T
Add-On Interest: Interest added upfront → higher effective rate
Open-End Credit Methods:
Adjusted Balance
Previous Balance
Average Daily Balance
Minimum Payment Trap:
Paying only minimum → high total interest + long repayment time
Rule of 78s: More interest paid early in loan term
Managing Debt
Steps:
Notify creditors if trouble paying
Know rights (Fair Debt Collection Practices)
Reasons for Debt: (Emotional spending, social pressure, misunderstanding, overindulgence)
Warning Signs:
Paying minimums, using savings for bills, late/missed payments, no savings
Consequences: (Stress, family issues, health decline, bankruptcy)
Help: Non-profit counseling (Malaysia: AKPK)