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Chapter 4 (Part 2): Cost of Credit & Debt Management - Coggle Diagram
Chapter 4 (Part 2): Cost of Credit & Debt Management
1. Analyze Major Sources of Consumer Credit
Inexpensive Loans
Parents or Family Members
Loans using assets as collateral (e.g., against a Certificate of Deposit)
Medium-Priced Loans
Commercial Banks
Savings and Loan Associations
Credit Unions
Expensive Loans
Finance Companies
Check Cashing Companies
Retailers (Car/Appliance Dealers)
Bank Credit Card Cash Advances
2. Determine the Cost of Credit (Interest Formulas)
Key Terms
Finance Charge:
Total $ cost of credit (interest + fees).
Annual Percentage Rate (APR)
: Yearly cost of credit (%) - the key number to compare offers.
Malaysia's Interest Rate System
SBR (Standardised Base Rate):
Replaced the old BR (Base Rate).
Standardized across all banks.
Linked only to the Overnight Policy Rate (OPR).
Makes loan comparisons easier for new borrowers.
Effective Lending Rate (ELR) = SBR + Bank's Spread
This is the actual rate you pay.
What to compare: The ELR (and the bank's spread) when shopping for loans.
Check the
Product Disclosure Sheet (PDS)
for details.
Trade-Offs in Cost
Term vs. Interest:
Longer term = lower payments but more total interest.
Risk vs. Rate
: You can get a lower rate by:
Accepting a variable rate
Providing collateral
Making a larger down payment
Choosing a shorter loan term
Interest Calculation Methods
Simple Interest
Formula: I = P x r x T (Interest = Principal x Rate x Time)
- Simple Interest on Declining Balance
: Interest is paid only on the remaining principal. Frequent payments save interest.
Add-On Interest
Interest is calculated on the original principal and added on upfront.
Result: Effective interest rate is higher than the stated rate.
3. Develop a Plan to Manage Your Debts
First Step
: Notify creditors immediately if you can't make a payment.
Fair Debt Collection Practices:
Debt collectors must send a written notice within 5 days of contact.
You have the right to dispute the debt and request verification within 30 days.
Reasons for Debt Problems:
Emotional spending, keeping up with others, overindulgence, lack of communication, high finance charges.
Warning Signs of Debt Problems
Early Signs
: Paying only minimums, increasing total balance, missing payments, using overdrafts/cash advances for expenses.
Serious Signs:
Using savings for bills, borrowing to pay old debts, not knowing how much you owe, being denied credit, neglecting health needs.
Serious Consequences of Debt:
Loss of job (garnishment), family health issues, marital difficulties, neglect of children's needs, bankruptcy.
4. Evaluate Sources for Debt Assistance
What to Do
: Postpone credit purchases, talk to creditors, seek non-profit help.
Key Source in Malaysia
:
Agensi Kaunseling dan Pengurusan Kredit (AKPK)
A free, non-profit agency providing financial counseling and debt management programs.
Services: Budgeting advice, debt restructuring negotiations with banks, financial education.
Website:
https://www.akpk.org.my