27th May 2020 - 7 min read
Welcome to the first installment of the #AskHannAnything series, where readers submit their personal finance queries and I provide some actionable advice to kickstart their plans.
Before we start this month’s #AHA, I’d like to give some context behind the series. Why #AskHannAnything, you may ask? I’m inspired by the genuinely interesting content in the Reddit AMAs (Ask Me Anything), where the person in question can give in-depth, “not-PR-friendly” replies. Plus, it adds another dimension to our content offering at RinggitPlus, which already offers useful guides alongside current personal finance news.
In my time as a certified charterholder, I come across clients whose financial queries range from “I have RM X in my account, should I buy a house or invest in the stock market?” to “I have RM Y in debt across home loan, student loan, and loan shark, and I’ve just been retrenched. What should I do?”. Normally, the services of a financial advisor/certified charterholder is chargeable by the hour, but in the spirit of cultivating financial literacy and making smarter money decisions, #AskHannAnything was born.
The queries posted in this series have been curated to cover an extensive range of issues, and all queries have been posted with consent and are not edited whatsoever (names may be changed for anonymity). With that, here’s this month’s top query! (Next month’s intro will be much shorter, I promise!)
My current take-home pay is RM4,000 monthly (after EPF and SOCSO deductions) and I plan to buy a new car (Proton Saga Premium) in January next year. It will cost RM42,000 (OTR) for a 7-year loan period. The downpayment is RM6,000. Interest rate at 3% (monthly repayment: RM506.33).
However, I have some family financial matters and plan to take a personal loan:
Personal Loan: RM20,000
p.a: 5.33% (Interest per annum: RM 1,066/ Interest for 3 year-repayment: RM3,198)
Monthly Installment: RM644.39
Currently, my installment is as follows:
(PTPTN Outstanding Balance in December 2019 = RM35,180.19)
2) UOB Credit Card = RM690 (use my credit card to pay home expenses/bills monthly and has always paid in full on time).
Will it matter if I apply for a personal loan first, then buy a car? Or I should buy a car first then take out a personal loan?
Friends have advised me to be aware of my CTOS score and CCRIS. (Can you please explain these to Cs (as in CTOS score and CCRIS)? Thank you.
Additionally, I would like to know the pros and cons of taking out a personal loan.
Hi Anonymous, thanks for the question.
Assuming you don’t have any other outstanding liabilities or debt repayments than what you describe, on your new car and personal loan plan, there are 2 things that you need to think about:
1. Your DSR and Affordability
Debt service ratio (DSR): monthly repayments ÷ monthly income
DSR or Debt Service Ratio (monthly repayments divided by monthly income) is a metric that banks use to determine whether someone can continue to service their loans or not. There is no common hurdle % as it will differ based on the various banks, your income level and employment type, but in general if you keep it under 50% (i.e. monthly debt commitments are under 50%) then that should be approvable in most circumstances and banks.
What this means is if you’re earning RM4,000 after EPF and SOCSO, then your total debt repayments (after your new loans) should be under RM2,000. One thing to note: for credit cards, most banks will take a ratio of 5% of your credit limit as debt servicing amount, rather than your monthly on-time repayment.
Assuming your credit limit is at RM10,000, looking at your circumstances, this should be approvable (RM506.33 + RM644.39 + RM300 + RM500 = RM1,950) unless your credit card has a limit way over RM10,000.
Having said that, DSR is a bank measure, but you should also consider your own affordability: if you had an income of RM4,000 but debt repayments of RM2,000, are you able to save or at least survive? Banks may approve you but you should consider if you should “approve yourself”.
One thing that most people are not aware of is that some banks have a “credit hungry” flag or measurement, which is raised when a customer applies for too many credit facilities (loans/cards) at the same time. Obviously each bank is different, but as a rule of thumb, you should look to time your loan applications at least 3 months apart such that you can avoid this flag. From your question, it appears that you can wait longer to buy your new car than settling your family matters, so perhaps you can apply for your personal loan first before the new car.
On CTOS and CCRIS, your friends are right. Now that you are planning to take up a personal loan, you need to be aware of your CCRIS and CTOS score. To break it down for you, CCRIS (which stands for Central Credit Reference Information System) is a system created by Bank Negara Malaysia that collects credit information on borrowers from participating financial institutions and supplies the information back to them. In other words, it is a system that banks refer to in order to know your financial records, before they decide if they should approve or reject your application.
As for CTOS, it is a credit reporting agency that compiles and provides credit information in Malaysia. It provides a comprehensive report that helps you understand your credit health and identify the areas that you need to work on to improve your creditworthiness. Not just that, it also contains your personal details, CCRIS records, directorships, legal action records and the number of times you’ve been searched. Finally, a CTOS report also has a “score” that basically summarises your credit health (the higher, the more financially healthy you are).
Essentially, a credit report is like your report card at school. It tells you how you did, financially, for the past 12 months and where you can do better for the next term.
Before I answer your question on the pros and cons of taking out a personal loan, you must first understand how a personal loan works. Personal loans can be a useful financial tool to get a sum of cash quickly, especially in times of emergency. Most banks charge flat interest rates for their personal loans – a type of interest that is charged on the principal loan amount throughout the tenure of the loan, regardless of the outstanding balance.
Most of the time, personal loans are taken out when a person needs a sum of money quickly. However, some people use them as debt consolidation tools. If you have a huge sum of credit card debt across multiple cards and you can’t repay them all at once, a personal loan can be used to repay the whole amount owed, and then the loan is paid in structured intervals at lower interest rates.
If you would like to find out and compare available personal loans in the market to see what’s best for you, you may check out RinggitPlus.com.
#AskHannAnything is a monthly series where our co-founder, Hann Liew, offers advice to users who submit their personal finance queries. Want to pick Hann’s brain? Drop him an email at [email protected] with your queries. We will publish the most useful ones at the end of each month.
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