FEM 3204 : 3 (2+1)
Perancangan Kewangan Dalam Pasaran Global
Financial Planning in a Global Market
HUSNIYAH BT. ABD. RAHIM
BILIK A2-14
Jabatan Pengurusan Sumber & Pengajian Pengguna
Fakulti Ekologi Manusia
Chapter 5
Cost and Benefit of Non-cash
Transaction
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

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
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
Cash versus Credit(cont.)
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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
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 I’ll 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?
Cash versus Credit –
Advantages of Credit
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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 – don’t have to bring along a
big sum of cash
One payment a month (monthly payment)
Cash versus Credit –
Advantages of Credit (cont.)
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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)
Cash versus Credit –
Disadvantages of Credit
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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
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

Cost and Benefit of Using Credit (cont.)
2.
-
-
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
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 > total finance charge
- Credit’s convenience aspects – no large sums of
money to carry, single bill each month, record
of purchases
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%
Choosing Credit
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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)
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
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
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 =
2xnxI
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
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 (1+1) RM2,000
The APR is same as the interest rate
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 (2+1) RM3,000
The APR is > than the stated interest rate
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
NxA
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
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
Credit: Sources
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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 bank’s credit standards
The loan can be either secured or non-secured
depending on the loan’s size & borrower’s 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
Credit: Sources
Advantages (comm. Banks; cash loan)
 The APR on most bank’s 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
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
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 borrower’s account depends on
the customer’s credit’s record
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
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
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
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
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
member’s with credit record that does not meet the
standards
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
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
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 policy’s cash value
 It has no set repayment schedule; up to the
borrowers discretion
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
policy’s death benefits
 Borrower’s 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
Credit: Sources (cont.)
Savings & loan association: Secured savings loan
 Offer cash loan secured by a depositor’s 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 account’s interest
 So the loan’s effective cost is low
 Nowadays, non-members are also offered the
loan with higher APR
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
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
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