FEM 3204 : 3 (2 1) Perancangan Kewangan Dalam Pasaran Global Financial Planning in a Global Market

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FEM 3204 3 (21)Perancangan Kewangan Dalam
Pasaran GlobalFinancial Planning in a Global
Market

• HUSNIYAH BT. ABD. RAHIM
• BILIK A2-14
• Jabatan Pengurusan Sumber Pengajian Pengguna
• Fakulti Ekologi Manusia

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Chapter 5 Cost and Benefit of Non-cash
Transaction
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Cash versus Credit

• Three ways consumers can finance their purchases
• i. Draw on their savings
• Ii. Use present earning
• Iii. Borrow against expected future income

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Cash versus Credit(cont.)

• Credit principles
• Credit is an arrangement to receive cash, goods,
  or services now and pay later for them in the
  future
• Credit is an advance (or loan) of money with
  which to purchase goods and services
• Credit is an advance of goods services in
  exchange for a promise to pay at a later date
• Borrow money from a lender
• A medium of exchange with limited acceptance
• The use of money from future income

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Cash versus Credit(cont.)

• Consumer credit
• is the use of credit for personal needs, by
  individuals and families
• credit granted to an individual especially to
  finance the purchase of consumer goods or for
  personal expenses
• Increase the current purchasing power but
  reducing future purchasing power. Overall, it
  reduced the purchasing power as finance charge
  are paid for the credit service

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Cash versus Credit(cont.)

• The finance charge included all related costs
  interest, processing fee
• Have period of maturity, installment amount,
  repayment period and frequency of payment
• The installment amount maybe fixed or varied
  depending on type of credit
• The difference in rate of finance charge or
  maturity period affected the amount of finance
  charge and monthly installment
• To reduce wastage of money, examine the finance
  charge maturity period

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Cash versus Credit (cont.)

• Before using any credit for major purchase, ask
  yourself some questions
• Do I have cash for the down-payment?
• Do I want to use my savings for this purchase?
• Does the purchase fit my budget?
• Could I use the credit Ill need in some better
  way?
• Can I postpone this purchase?
• What are the opportunity costs of postponing the
  purchase?
• What are the financial psychological costs of
  using credit for the purchase?

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Cash versus Credit Advantages of Credit

• Current use of goods services
• Permits purchase when funds are low
• A cushion for financial emergencies
• Take the opportunity of low prices during sales,
  however have to determine whether the amount
  saved from low prices is more than the finance
  charges
• Easier to return merchandise (hire-purchase)
• Convenient when shopping dont have to bring
  along a big sum of cash
• One payment a month (monthly payment)

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Cash versus Credit Advantages of Credit (cont.)

• Safer than cash no cash carried, thus does
  not attract thiefs
• Have a record for the purchased item
• Needed for hotel and car reservations and
  shopping online (credit card)
• To take advantage of grace period in hirepurchase
  
• May get rebates, airline miles, or other bonuses
  (credit card)
• Indicates financial stability (as you are being
  granted credit by financial institution)

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Cash versus Credit Disadvantages of Credit

• Tend to overspend
• Can create long-term financial problems and slow
  progress toward financial goals
• Potential loss of merchandise due to default
  payment
• Ties up future income
• Credit costs money more costly than paying with
  cash

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Cost and Benefit of Using Credit

• Two types of cost involved
• 1. direct cost
• - finance charge interest processing fee
  charged directly by the seller
• - reduce purchasing power in the future paying
  the finance charges used-up some money that
  could be used for other expenses, thus limiting
  the expenses for other items

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Cost and Benefit of Using Credit (cont.)

• indirect cost
• less flexibility have a payment schedule that
  restricted the monthly use of money for other
  expenses
• high risk in the case of hire-purchase of
  electrical goods or car, it may be repossessed by
  the seller

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Cost and Benefit of Using Credit(cont.)

• Benefit
• Borrower receives the service from those items
  immediately
• Can take advantage of a sale price on an item
  providing the saving gt total finance charge
• Credits convenience aspects no large sums of
  money to carry, single bill each month, record of
  purchases

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Credit Limit - Credit Ability

• Are you able to repay back the credit/loan?
• Make sure there is no default payment for the
  previous credit obtained
• Make sure that the credit applied can be repaid.
  This can be determined by the following
• 1. List all the credits previously obtained
  determine the total amount
• 2. Compare the amount of monthly installment
  (monthly installment of previous credit plus the
  new credit) with disposable income (after
  deducting the income-tax other mandatory
  deduction EPF)
• 3. The ratio of the monthly installment with the
  disposable income should be less than 20
• 4. If it involved housing loan, the ratio should
  not exceed 35

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Choosing Credit

• The source of credit should be from government
  recognised institutions
• The repayment period should be less than the life
  time period of the item
• Compare the finance charge from various loan
  sources choose the lowest
• Identify the requirements and the terms of loan
  repayment
• Identify method location of repayment (counter,
  account deduction standing instructions,
  internet, ATM)

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Types of Credit (cont.)

• Closed-End Credit
• Used for specific purpose involves a specific
  amount
• Mortgage loan (property house, land, building)
  automobile loan (hire-purchase), installment loan
  for purchasing furniture appliances
  (hire-purchase)
• There is a contract or agreement
• Lists the repayment terms number of payments,
  payment amount, cost of credit
• May require down-payment or trade-in the balance
  repaid in equal weekly or monthly payments over a
  period of time
• Seller holds title to the merchandise until
  completion of payment

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Types of Credit (cont.)

• Open-end Credit
• Bank credit card, departmental store credit card,
  overdraft bank
• Credit card
• Credit not used for single purchase can make any
  purchases cash advance not exceeding the line
  of credit (credit limit) maximum amount of
  credit made available to you
• Pay interest (periodic charge) or other charges
  late payment
• Grace period of 20 to 25 days to pay a bill in
  full before charging any interests
• Overdraft bank credit granted is deposited in
  current account

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Credit Finance Charge

• Annual percentage rate
• Is the percentage cost of credit on a yearly
  basis
• Is a standardised calculation that incorporates
  interest and other fees to show the total cost of
  the loan averaged over the entire loan term
• Can be used to compare costs, regardless of
  amount of credit repayment period
• An approximation calculation of APR is
• APR 2 x n x I
• P(N 1)
• Where n is the number of installments paid in
  one year
• I is the amount of interest charged P is
  the principal or loan amount
• N is the total number of installments

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Credit Finance Charge (cont.)

• Example Loan RM1,000
• Interest rate 5 with an interest of RM50
• Repayment at the end of 1 year
• Answer
• The total amount of loan (RM1,000) can be used by
  the borrower till the end of the year
• To express it in APR
• APR 2 x n x I 2 x 1 x RM50 RM100 0.05
  or 5
• P(N 1) RM1,000 (11) RM2,000
• The APR is same as the interest rate

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Credit Finance Charge (cont.)

• Example
• Loan RM1,000 Interest is 5 and calculated as
  RM50
• 2 repayments 1st at the end of 1st half-year
  2nd is at the end of 2nd half-year (same year)
• Answer
• APR 2 x n x I 2 x 2 x RM50 RM200
  0.066 or 6.6
• P(N 1) RM1,000 (21) RM3,000
• The APR is gt than the stated interest rate

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Annual Percentage Rate(as in Hire-Purchase Act
1967)

• 2NF (300C NF)
• 2N2F 300C (N 1)
• Where
• N is the total number of instalments
• C is the number of instalments that, under the
  contract, will be paid in one year, or, where the
  contract is to be completed in less than one
  year, the number of instalments that would be
  paid in one year if instalments continued to be
  paid at the same intervals
• F is the amount determined in accordance with the
  formula
• 100C x T
• N x A
• Where
• C is the same number as the first-mentioned
  formula
• T is the total amount of the pre-determined terms
  charges
• N is the total number of instalments
• A is the amount financed

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Credit Sources

• Type of sources of consumer credit for cash
  loans
• Commercial banks CIMB, Maybank, Ambank
• Credit union cooperative financial institutions
  Kooperasi Sejati, Kooperasi Kowaja
• Life insurance Prudential, Takaful Ikhlas
• Savings and loans association Bank Rakyat
• Pawn-shop
• Consumer finance companies Amfinance (no longer
  existed following the merger practice in Malaysia
  recently) absorbed under the commercial banks as
  units or departments

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Credit Sources

• Commercial banks personal cash loan
• Offered personal cash loan to a wide range of
  borrowers
• Larger amounts will be lend if the borrowers
  meets the banks credit standards
• The loan can be either secured or non-secured
  depending on the loans size borrowers credit
  record
• The APR of the finance charge ranges from 8 to
  20
• With secured-loan, the interest is lower
• Usually a credit life insurance is needed
  together with the loan offered

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Credit Sources

• Advantages (comm. Banks cash loan)
• The APR on most banks cash loan is very
  competitive with other lenders
• Borrowers establish a credit record by repaying
  the loan on time
• This credit record may qualify them for other
  loans offered by the bank, eg. Home mortgage,
  credit card, overdraft on current account

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Credit Sources

• Disadvantages (comm. Banks cash loan)
• As the banks restrict the lending to borrowers
  with strong, well-established credit records,
  this lending source might not be available to all
• Also, banks are reluctant to offer small amount
  of loan with short maturities

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Credit Sources

• Commercial banks Overdraft
• Many banks offer an automatic overdraft on the
  current account of customers
• The customer can write checks exceeding the
  amount of money in the account and up to a
  certain limit that the banks approved
• The extra or advance amount exceeding the amount
  in the borrowers account depends on the
  customers credits record

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Credit Sources (cont.)

• Commercial banks Overdraft (cont.)
• No fee will be charged as long as the advance is
  unused
• Once used, the finance charge is based on the
  amount of advance used and the number of days
  outstanding (still owing)
• The APR ranges from 12 18
• The daily finance rate is computed by dividing
  the APR by 365 or 360 days

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Credit Sources (cont.)

• Commercial banks Overdraft (cont.)
• The daily rate times the amount outstanding gives
  the daily finance charge
• This daily finance charge times the number of
  days outstanding gives the total cost of the
  overdraft
• Eg. Finance charge for RM200 advance of the
  overdraft outstanding 21 days APR is 12
• RM200 x 21 days x (12 / 365 days)
• RM1.38

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Credit Sources (cont.)

• Advantages (Overdraft)
• When it is unused, it costs nothing to the
  customer
• Once the automatic overdraft has been authorised
  for the current account, it can be used without
  the need for further negotiation
• The APR is competitive with other short-term cash
  loan

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Credit Sources (cont.)

• Disadvantages (overdraft)
• It can be easily misuse as it is easy to use
• Some people depend on the overdraft for their
  expenses between their pay-day
• If they use almost up the limit of the overdraft,
  their repayment needed would just to cover the
  finance charge and not being able to pay the
  balance owed

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Credit Sources (cont.)

• Credit Union Cash loan
• Credit union is a mutually owned, non-profit
  financial institution that provides savings
  lending services to members only
• To be a member, the individual must be part of
  the common group that formed the credit unions
  eg. Those working for the same company, live in
  the same neighbourhood
• Offered unsecured cash loans secured loans are
  for members with credit record that does not
  meet the standards

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Credit Sources (cont.)

• Advantages (credit union cash loan)
• Low APR, generally one of the lowest of all
  lenders as it is offered for members
• Loan available for short maturities small
  amount of loan

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Credit Sources (cont.)

• Disadvantages (credit union cash loan)
• Must be a member to obtain the benefit of low APR
• Nowadays, nonmembers have been offered the loan
  with higher APR
• The borrowing needs are not confidential when
  their loan request is submitted to the loan
  committee, that is staffed by their fellow members

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Credit Sources (cont.)

• Life Insurance Cash Loan
• Offered cash loan for customers purchasing their
  life-insurance policies
• Meaning that the cash loan offered is secured
  with their life-insurance policies
• Advantages
• Low finance charge or APR
• No credit investigation or qualifying standards
  as all policy holders qualify for it up to 95 of
  the policys cash value
• It has no set repayment schedule up to the
  borrowers discretion

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Credit Sources (cont.)

• Disadvantages (Life Insurance Cash Loan)
• You must be a policy holder to qualify for the
  loan
• The loan size depends on the cash value of the
  policy, so only small amount of loan will be
  available for small amount of cash value
• Borrowing on the policy will reduce the insurance
  coverage, since any outstanding loan reduces the
  policys death benefits
• Borrowers tend to postpone repaying as it lack
  the schedule repayment
• The minimum payment you must pay is the finance
  charge, if fail to make the payment, the entire
  policy could be cancelled

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Credit Sources (cont.)

• Savings loan association Secured savings loan
• Offer cash loan secured by a depositors savings
  account
• Can range from 90 to 100 of the depositors
  savings account balance
• The interest rate is slightly higher than the
  earning from the savings accounts interest
• So the loans effective cost is low
• Nowadays, non-members are also offered the loan
  with higher APR

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Credit Sources (cont.)

• Advantages (Savings loan association Secured
  savings loan)
• Can provide emergency cash where a depositor does
  not want to withdraw money from the savings
  account
• It can be used by a first-time borrower to
  establish a credit record
• Disadvantage
• It is restricted to short-term emergencies
  situation as it is secured by as a savings
  account. As the amount in savings account might
  be small, thus the loan amount available is also
  small

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Credit Sources (cont.)

• Pawn-shop Cash loan
• Offer loan to a borrower who use personal
  property as security
• To make it more secure, the pawnshop takes
  possession of the property returns it to the
  borrower only when the loan is repaid
• If the borrower fail to repay the loan, the item
  can be sold
• The assurance of repayment is based on the sale
  proceeds of the item, thus the loan offered is
  usually less than 50 of the market value o the
  item

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Credit Sources (cont.)

• Advantages
• No credit investigation since the value of the
  item used as security exceeds the loan
• The borrower can obtain the money quickly with
  minimal paperwork
• Disadvantages
• The item used as security must be left at the
  pawnshop until the loan is repaid
• The amount of loan is only half the market value
  of the item used as security
• The finance charge is high the maturity is
  short
• If fail to repay, you will lose the item to the
  creditor