Should You Use Your EPF Savings To Apply For A Personal Loan?

Tags: EPF, News, retirement

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One of the chief criticisms that Budget 2023 faced is due to the fact that there were no targeted Employee Provident Fund (EPF) withdrawal schemes, which was one of the top items on peoples’ wishlist.

However, the prime minister had since announced that the government is now looking into the possibility of allowing EPF members to use the balance of contributions in their account 2 as a collateral when applying for personal loans.

Well, the EPF has now finalised the mechanism as well as the terms and conditions for the Account 2 Support Facility. However, the main question remains; is this really a good move? Let’s take a closer look.

How EPF members can use Account 2 savings to apply for loan/financing

Following is summary of EPF's terms and conditions to use Account 2 as loan collateral.

Who can apply

Phase 1 starting April 7, 2023 will be open for 1 year to members aged 40 and above but below age 55
Phase 2 for those below 40 will be announced at a later date
Members must have at least RM3,000 in Account 2 to be eligible

How this facility works

Maximum financing limit is RM50,000 (but subject to individual balance in Account 2)
Repayment tenure is up to 10 years
Financing rates will range from 4% to 5%
EPF will pay the principal and accumulated dividend from Account 2 into the member’s financing account with the selected bank at any age between 50 and 54, as chosen by the member (max. tenure is 10 years) or
EPF will pay the principal and accumulated dividend from Account 2 into the member’s financing account with the bank at age 55. The amount paid will first be used to settle the remaining personal financing balance, if any, before returning any excess to the member

FAQs and transaction support

Starting from 5 April 2023, members can https://fsa2.kwsp.gov.my to check their eligibility and find answers related to this facility
Members should also update their mobile numbe at any EPF Self-Service Terminal (SST) to receive the Transaction Authorisation Code (TAC) to verify their identity when conducting transactions.

Why the people want EPF withdrawals

But first, before we can consider the idea of using EPF savings as a collateral, we first have to understand why this move is being considered at all. So, let’s have a look at what the underlying problem that this idea is trying to solve.

The underlying problem is quite simple, and that is that a lot of Malaysians are struggling with their finances right now.

And the reason for this is manyfold. Some of them are still reeling from the effects of the worldwide Covid-19 pandemic, some of them are struggling with the high inflation, and the rising cost of living is also causing a lot of Malaysians to feel the heat financially.

Hence, in order to help combat all these financial problems, a number of Malaysians are hoping for another round of EPF withdrawals as a form of cash assistance to help them ride out this wave of financial uncertainties.

The impact of using EPF savings as loan collateral

The move to allow EPF savings as collateral looks like a reasonable middle ground to help alleviate some financial problems, without resorting to more government handouts.

On the surface, it would help those who would normally not qualify for personal loans acquire financial assistance. Especially for those who have lost their jobs, but are sitting on a reasonable amount of EPF savings. Similarly, it could help those with poor credit scores secure more funding than they normally would be able to get from banks.

The idea is that people would eventually be able to pay off the loans, which would leave their retirement funds untouched.

As you might already know, the EPF works in a way that the money from the members are pooled together, and used for investments, in which the members will reap the benefits from.

And this is where the withdrawal scheme hurts. More withdrawal schemes means more money will be taken out of the pool, which in turn means less money that can be invested, which then means that the remaining members will be receiving less benefits.

According to former Finance Minister Tengku Zafrul in a parliamentary session last year, that without the three EPF withdrawals that were already allowed then, the EPF dividend for 2021 would have reached as high as 6.7%, higher than the 6.1% declared, with the provident fund having RM5.4 billion more to distribute to members.

So this means that while the EPF withdrawal scheme might be a very popular move with the people, it hurts the rest of the members who chose not to withdraw any of their funds, as it reduces the amount of dividends that they would receive.

This essentially means that everyone stands to benefit from this decision, as it leaves the EPF funds untouched – while also providing financial assistance to those that may need it.

What could go wrong?

All this is assuming that those that borrow based on their EPF savings are able to repay the loan. Due to the current economic climate, and increased interest rates, the amount that needs to be repaid could cause those who are already struggling to spiral further into debt.

Additionally, those that default on their loans could eventually lose a substantial portion of their retirement fund (the EPF account 1 will remain untouched). Which puts them in a worse position than if they had not taken the loan in the first place.

Yes, it might be a good stopgap measure to help people survive in emergencies, however after four different withdrawal schemes being approved and the people are still struggling, a case can be made that perhaps loans based on EPF savings do not get to the root of the problem.

Is using your EPF as collateral a good idea?

The good thing about this idea of using your EPF funds as collateral is that it does help you get financial assistance, without the impact of actually withdrawing your EPF funds. This means that the people will be able to get the financial assistance you need, while also ensuring that you will be enjoying the dividend from your EPF savings as well.

However, it does need to be said as this is a personal loan, so carefulness and prudence in financial planning is needed to ensure that the loan does not become another financial burden on the people.