The Circle of Debt

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A couple of weeks ago, it was interesting to get caught in a conversation regarding debt, and why most of us just cannot seem to get out of. Despite all the various Bank products introduced to help consumer, why do we keep finding ourselves deeper in debt? And with packages offering below base lending rates, why can’t we seem to pay off our loans?

The answer, is not as straightforward as it seems. Some may put it down to bad money management, unforeseen circumstances and unexpected needs. While it is true that some consumers faced these situations, there are many others who are victims of their own vice. And that vice is greed or even worse… “want”.

I cannot blame you. The credit packages sometimes seems too good to be true. Very low rates for housing loans. Longer period for car loans. Easy applications for personal loans. Excellent rewards for credit cards. While all of these are attractive packages, all of them are designed for one thing and one thing only; increase the credit given to the customers.

We have to remember that Banks are commercials entities in the business of lending money. It is not their fault, it is what they are being set-up for. Consumers play a large part in this, which means there is an existing need for credit from the Banks. While many are still looking at credit as a means of survival, some have started to see credit as a means to obtain a certain lifestyle; and the Banks being good at what they do, takes advantage of this desire.

Beyond traditional banking, the business have recognised that everyone has a lifestyle that they aspire to. A new watch. Brand new car. Furniture. Bigger house. Dream holiday. Shopping benefits. Renovation. Latest TV model. Not in the future, but now. Immediate. Instant. Now. People put in so many hours at work, and at the end of the day, aspire to afford that “want”. I myself fall into that category. A tough day at the office can trigger a retail therapy; I want that new laptop now. Credit card in hand, a quick swipe and now instalments for the next 6 months. Easy.

And credit is really made easy. Instalments are kept low. If you have a good record in CCRIS and a clean CTOS, you can borrow as much as you want, but once the clean records become dotted with delinquent payments, things get more difficult. So now we are stressed at keeping up with the payments, sometimes up to a point that you need to further borrow to ensure that your record is updated. Only with a clean record can ensure you get more and more credit; just in case you need it.

The truth is, we are all under pressure to fit into society; to have brand new things, go to new places, and be seen as overall successful. There pressure will always be there to conform and maintain your image. How else do you explain the high prices of good solid cars, and yet the number of these cars are relatively high in the market? A RM300,000 Mercedes or BMW will surely be out of reach of most people, but have you seen the number of these cars in the market? For an outsider, Malaysia may be regarded as a prosperous nation judging from the number of expensive cars. What is not apparently clear is that most are purchased on easy credit; long term, low interest rate and even lower down payment. Car loans low go for 8 or 10 years tenure, and that is just crazy, when most cars will be in decline after 5 years or 7 years. Re-sale for such cars after 7 years will be pathetic, so why would one borrow 8-10 years?

The sad fact is, we may never be out of debt, and that was never the intention of Banks when they offer you the credit. Banks need your business, and the great packages on offer is not really meant to benefit consumers, but mostly to beat out the competition in securing your business. And the credit amount is sometimes exceeding what consumers can afford; with the introduction of CCRIS, a lot of the risk is mitigated to the track record of the customer via CCRIS, and this allows the Bank to take more risks when approving a loan. In the rush of offering more credit to customers with great track record in CCRIS, the Banks risk to over-lend to the customer, which over time places a burden on their wallets, leading to a stressed CCRIS track record. A good paymaster is finally tipped on the scale towards being an average paymaster, which may one day turn into a bad one once the “free” credits become insurmountable.

The weakness of all of this originates from the huge disparity between the levels of income and the price of essential and basic goods. Forget about food; no matter how high the price goes, people will find ways to eat. I am referring more to the big ticket items such as a house and a car. This is where the huge disparity shows. In general, an average Malaysian earns roughly RM3,888 per month, or lesser (CIA World Factbook listed Malaysia to have a USD$14,800 income per annum per population). Compare that to their basic necessity. A house costs RM150,000, RM200,000, RM300,000 or more. That is roughly almost 40 times the salary of the average Malaysian. That means just to pay off the principal, it will take you 40 months to pay-off, and with the 1/3 rule for lending, you will be paying for 40 months x 3 = 120 months just to clear the principal.

More significantly, a car price in Malaysia is RM50,000 at the lower end, and RM130,000 at the sedan category. I have taken the Toyota Yaris at RM107,591 otr price as comparison with other countries, as this car price is readily available. Against the average income of RM3,888, that translates to 28 times the average income. With the 1/3 rule for lending, this means at minimum, it will take you 28 x 3 = 84 months (7 years) to pay off the principal. Add the interest for it, you could be paying somewhere about RM129,000 over a period of 8 years. 

Compare that to a country like the UK, where the average income is GBP2,900 (RM9,248) but car prices are about GBP7,000 at the lower end and GBP20,000 at the medium/higher end. A Yaris will cost the Brits GBP14,240 (RM70,971). This is effectively 5 times their salary and with the 1/3 lending rule, they can be out of debt within 2 years (5 x 3 = 15 months). The price/income gap for cars (Yaris) are also interesting; Gap of RM27,000 for the US, RM62,000 for the UK, RM68,000 for Thailand, but a whopping RM104,000 for Malaysia. This is a huge disparity.

Some may argue that these calculations are simplistic, but they are reflective of the income gap situation. Even with a Waja for RM59,000 it will mean a 45 months payment (RM59,000/RM3,888 x 3) for the principal. What makes sense is the price range of RM30,000 to RM40,000 that the Saga and the Iswara fall into place. But this is where the “want” comes in. Bigger and better. It is hard when you aspire to have something better, which comes at a higher price. It is even harder to resist when Banks makes the process easier for consumer.

To be out of this circle of debt, real income needs to increase. I feel that the average income of Malaysians has remained stagnant in the past few years, and while prices of houses has remained stable or in case of cars, have improved its value for money, the gap is still huge. Cars are essential for lifelihood, which will afford one a good house. And to indirectly support a car purchase, other credit products are made available easily to the consumers with good credit records. Personal loans and credit cards; these are the main culprits to keeping you in debt, simply due to its ease to access and the high interest rates. Some people use these products too early, while others use it too much.

Circles of debt, like it or not, is what fuels the banking industry. It is based on the needs of the consumers, but as the country grows internationally without any borders, due to media and internet, the “wants” of the consumer becomes more prominent and sophisticated. Lifestyles “wants” now are becoming trendy as they are aggresively fueled by global branding. And due to the low levels of real income, consumers turn to debt to support these “wants”. It is tempting to accumualte more “easy” credit, but what is really important is to be able to realise that the only way to break this circle is to manage these lifestyle wants and also reduce the disparity between price of large items and income. Otherwise, discussions on why Banks continue to make tons of money even in hard economic times are fruitless; the truth of the matter is whether we can afford our “wants” and more importantly, should we finance our “wants” through further borrowings.

Sometimes, all it takes is willpower, but that, as everything else in life, is easier said than done.

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