Do You Need To Apply For The Hire Purchase Loan Moratorium?
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The National Security Council has announced that the Movement Control Order (MCO) will now be extended until February 18, 2021. This applies to all states except Sarawak. Earlier in January 2021, the prime minister had also announced additional Covid-19 aid.
In response, Bank Negara (BNM) has also announced that borrowers can request moratorium extensions to their existing bank loans which will not affect their credit report and the continuation of the targeted repayment assistance initiatives.
The Association of Banks in Malaysia (ABM) and the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) have also issued a joint statement to assist affected borrowers with extensions of the existing moratorium. This repayment assistance has also been extended to those affected by the devastating floods in several states.
Will we get slapped with additional interest if we take up the moratorium, or will we not? That is a question that most people have.
To answer some of these confusions, we have written this article to breakdown three options that you have and what are the repercussions or benefits for each option.
Just a little context, BNM released a statement on March 25, 2020, on measures to assist individuals in dealing with their existing loans or financing during this challenging time. The statement says that individuals and SMEs will have the option to defer their loan or financing repayments from April to September 2020. This is applicable for performing loan and financing that do not have any outstanding payments for more than 90 days as of April 1, 2020.
On April 30, BNM released another statement to “clarify” the moratorium specifically for hire purchase loan and fixed-rate Islamic financing. In this new statement, it says borrowers will be required to go through some steps, based on the bank’s instructions, to complete the process of opting into the moratorium. It also says that banks will be required to inform the borrowers of any changes to the payment schedule and payment amounts.
On May 6, 2020, the Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz released a statement which says that no additional charges will be applied to deferred instalment payments during the entire six-month moratorium period.
What does that mean to you and me?
The confusion likely arises from the incredibly technical language used in the announcements, which may not be immediately understandable for a layperson.
The good thing is, if you have opted into the moratorium in April, you can still opt out of it if you change your mind.
With the latest changes, opting-in to the moratorium (which may require you to sign a consent to do so) seems to be the best option.
Example:
You have a hire purchase loan with the following details:
| Car loan amount | RM60,000 |
| Interest rate | 2.71% per annum |
| Initial loan tenure | 5 years |
| Total interest paid over loan tenure | RM8,130 |
| Total payments made to date | 24 |
| End date for the loan | May 2023 |
Option #1 Opt-out of the moratorium
If your finances allow you, you can consider opting out of the moratorium. Some banks may require you to provide consent to opt-in to the moratorium. This requirement differs from bank to bank.
According to BNM, even if you have opted-in in April, you can still opt-out with no penalty in May.
Here’s how the repayment schedule will look like in this option:
In this option:
| Total interest paid over loan tenure | RM8,130 |
| Additional interest incurred | RM0 |
| The end date of the loan | No change |
Option #2: Take the loan moratorium, but pay it off in a lump sum
With the latest changes, opting in for the moratorium comes with a lot of benefits. There will be no accrued charges whether you decide to pay off in one lump sum or resume your instalment at your usual amount. However, paying off the deferred amount in a lump sum may not be a palatable option for some people as it requires the individual to fork out a large amount of cash upfront at the end of the moratorium.
You can make the money you saved from not paying your car loan work harder for you by putting it in a high-interest account such as a Fixed Deposit account.
If your finances allow, this can be the best option for you. Here’s how.
Note: The total payable amount of RM7,949 is made up of 6 months’ repayments which were deferred and October’s repayment.
Assuming you deposit the monthly repayment amount of RM1,135.50 to a Fixed Deposit account every month for 6 months, here’s how much you can potentially make:
| Fixed/Term Deposit Interest Rate | 2.60% per annum |
| Total deposited | RM6,813.00 |
| Total earned | RM51.85 |
Option #3: Take the loan moratorium and extend loan tenure by 6 months
This is possibly the most popular option, especially for those who are impacted economically during this time. With the latest announcement from the Finance Minister, this is a great option as you get to conserve your cash flow and yet not incur any additional interest.
This means you will not have to make any monthly repayment during the moratorium period and maintain the same repayment after the moratorium. However, your loan tenure will extend for 6 months but there will be no additional interest accrued.
Here’s how the repayment schedule will look like in this option:
In this option:
| Total interest prior to moratorium | RM8,130 |
| The end date of the loan | November 2023 |
In conclusion, in Option #1, nothing really changes for the borrower, while in Option #2, you may stand to earn an additional bonus from something like fixed/term deposit accounts, as well as the security of having cash on hand.
In Option #3, which is likely the most common option, you will not incur the most interest but you will have to extend your loan by 6 months. However, 6 months extension may be worth it for the peace of mind in case of job or income loss during this period.
The calculations and options above may differ from bank to bank. Hence, it is best for you to speak to your bank to find out more about the options available for you.
Remember, the car loan may not be your only financial commitment. When you are deciding on which option to go for, consider your overall financial situation and expenses to ensure you can manage the payments post-moratorium.
Let us know which option you will likely go for in the comment section below!
This article was first published on May 1, 2020 and has been updated for freshness, accuracy, and comprehensiveness.
Image from Freepik
