FOR many individuals with average monthly earnings, managing life without relying on loans is nearly impossible.
While loans often evoke mixed reactions from experts and the public, they remain a necessary option for those unable to fund essential needs, such as purchasing a car or a home, with upfront cash.
If managed properly, loans may not be as daunting as they appear.
According to Nirmala Supramaniam, head of the Credit Counselling and Debt Management Agency (AKPK) Household Financial Education Department, understanding the 3Ps — Purpose, Payment Affordability, and Payment Record — is crucial before applying for a loan.
Nirmala stressed the importance of determining the purpose of a loan, as not all loans serve the same function. Although banks impose different interest charges depending on the bank and type of loan, individuals can choose not to be completely at the losing end.
“For instance, a housing loan is considered a productive loan because, in most cases, property values appreciate over time, offering a potential financial return when sold,” she explained.
“In contrast, lifestyle loans — used for weddings, holidays, or leisure purposes — are loans we should avoid.
“This is a common phenomenon. While certain wedding expenses are unavoidable, others are just to accommodate the couple’s lifestyles. It’s important to focus on investing in the marriage rather than the ceremony,” Nirmala said in her sharing after featuring as a special guest on Lite FM this morning.
As for the other 2Ps, which are payment affordability and payment record, Nirmala said it was important for individuals to consider researching these two areas.
“Payment affordability is crucial before taking out a loan, as loan repayments or commitments should ideally remain below 40% of our monthly income.”
“An ideal scenario is when 40% goes to loan repayments, 10% to savings and then the remaining 50% to manage monthly expenses.
“However, dedicating 40% of income might not be feasible for fresh graduates with modest salaries, as it could be insufficient to manage high loan commitments.
“For example, a fresh graduate earning RM2,000 would struggle if RM800 (40%) went to loan repayments, leaving just RM1,200 for other expenses for the entire month.
“This is why it is important to analyse payment affordability before getting ourselves entangled in unwanted circumstances.
“The last one is the payment record. We must make sure we are good paymasters to maintain a clean credit score for our credit reference information system (CCRIS),” Nirmala said.
Nirmala also highlighted the long-term consequences of failing to repay National Higher Education Fund Corporation (PTPTN) loans.
“When you apply for a new loan, financial institutions will look at the CCRIS report to determine whether you are a good paymaster or not, similar to students’ report cards.
“Also, it is important for graduates to note that some employers review CCRIS records during hiring.
“At AKPK, our CCRIS reports are inspected annually,” Nirmala said.
She further explained that maintaining good payment practices can help individuals avoid mental stress and lead a more peaceful life.
“Our mental health is very important, and if we can avoid damaging it, we should, especially by being a good paymaster for the loans we have to service,” she added.
To manage financial challenges effectively, Nirmala recommended the 4As – acknowledge when there’s a problem, analyse the situation thoroughly, act promptly and accordingly, and lastly AKPK! Seek professional guidance when needed.
Story by Kevin Vimal