Are you currently struggling to repay your personal loan, education or student loan, car loan, mortgage, home loan and credit card? There are many consequences of not paying or defaulting on your loans. Read more to find out what will happen if you are not able to pay back your loans and what can you do to fix this problem quickly.
If you’ve landed on this article, chances are you’ve had your income affected one way or another. With that comes the worry about how you’re going to pay off your commitments.
The unfortunate reality is that the Covid-19 pandemic and the movement control order has affected hundreds and thousands of people around the world. Malaysia isn’t spared - as of 2nd June 2020, a total of 12.7 million Malaysians were left unemployed. This figure is expected to climb up to 2 million people according to Malaysian Employers Federation executive director Datuk Shamsuddin Bardan.
If you’re part of this statistic, you may start to reduce cost of living as you try to repay your commitments. While ignorance is bliss, don’t be in for a rude awakening when your debt catches up to you. We don’t like being the bearer of bad news, but to help you prepare yourself, here’s what happens if you don't pay back a loan. (Don’t worry - we’ve got some solutions later on!)
What could happen if you can’t pay off your loans in Malaysia
1. You will have to pay more. (Like, a LOT more.)
Regardless whether it’s your credit card (yes, it’s technically a loan since you’re using borrowed money), mortgage, car loan, or personal loan, you’ll start accumulating extra fees when you start to skip loan payments or skip credit card payment. As a result of missing your payments, banks are allowed to charge you interests depending on the rate you’d have previously signed on during your application.
It only grows because of compounding interest rates. Let’s say you owe the bank RM1000. As you miss your payment, you get charged, say, a 15% interest rate. Your current debt rises to RM1,150. Miss your payment again, and you’ll get charged another 15% on top of the now-increased balance, bringing your total sum to RM1,322.50. If you neglect paying your monthly dues, it will take only 5 months to bring your initial debt of RM1,000 to RM2,000!
To add to that, banks also have the right to increase your interest rate. The initial 15% (or whatever rate you signed to) can grow to 17% and 18%, depending on how badly you repay your debt.
When it comes to increasing your interest rates, the same goes for personal loans and home loans. While not all banks impose such practices, most do this in order to make you take your repayments seriously.
2. You can be barred from leaving the country.
This is especially true when it comes to repaying your education loan (PTPTN). While you will still have your passport, you won’t be able to get past immigration as your name will be under the immigration no-fly blacklist.
The great thing is that you don’t necessarily have to pay off the full amount. If you get stopped at immigration, you can make a call to PTPTN on the spot to ask them about how much outstanding debt you have, and the minimum amount you need to pay in order for you to get past immigration. If you have a credit card, you can charge that minimum to your card via that phone call… provided it doesn’t exceed your credit limit, of course.
3. You can lose your assets.
Ever heard of the term ‘kereta tarik’? Well, when your loan defaults, banks have the right to repossess your assets and basically ‘tarik balik kereta’. To get it back, you’ll have to first pay for all the outstanding debt and the cost of your car being repossessed. This is not just pricey, but extremely time consuming.
When push comes to shove, you may get your assets repossessed.
Likewise with your home - the bank will send you a court order that your house will be auctioned. You’ll then be evicted eventually and you’ll lose your home and equity that you may have established. Remember, until you pay off all of the home loan in full, the house is not yours and still belongs to the bank.
4. You can be sued.
Is defaulting on a loan a crime? Technically, no, but money lenders would likely turn to suing you if you can’t pay your debt. You may think, “Sue me for what? I have no money to pay also.” Well… they sue for three reasons:
- To garnish your wages. (Basically having the court order that your employer withhold some of your salary to be sent directly to the lender until your debt is resolved.)
- To place a lien on your property. (Basically putting a sign to ‘chup’ your property until your debt is resolved.)
- To freeze all or a part of your money in your bank. (That’s kinda self-explanatory.)
5. You will not get any financial help.
At this point, your credit score would have been completely destroyed. It’s pretty horrible to think that you’re pretty much unable to get any financial help right when you need it the most. However, at this point, lenders would see you as a high risk borrower due to the missed payments, so you will not get any financial help from any licensed lender.
This is usually the tipping point for borrowers to finally turn to Ah Longs, and we’re sure you’ve watched enough TV to know how that would end up. (Read: really badly.)
6. You may meet with unpleasant debt collectors.
Part of some of the consequences of not paying loans could include dealing with some pretty unpleasant people. Banks and lenders often hire debt collectors to get back money owed by individuals and businesses. Actually it’s not just them - even utility companies and telcos do the same. Debt collecting is legal in Malaysia, but only if undertaken by licensed debt collecting agencies. Bank Negara is pretty cool with them as long as these agents adopt good practices.
While some of these agencies are pretty gentlemanly with their debt collecting (e.g. calling debtors to remind them about payment, send debt statements, repayment notices, demand letters etc.), there are some who would also meet debtors to negotiate a repayment face-to-face.
Unfortunately, regulations are pretty lax in this field so there are plenty of instances of agencies operating in a… err… less than pleasant way. Think harassment and threats, over and over again. Just so you know, it’s actually illegal to do this. In fact, they can’t even call you more than three times a week!
Read more about your rights against debt collectors in our previous article here.
7. You may be filed for bankruptcy.
Failure to pay back a loan can result in bankruptcy, and it is probably the worst thing that could happen to you. Your creditors can eventually file bankruptcy against you with the Department of Insolvency, where they can seize your assets and sell them for proceeds to pay your creditors.
Here’s what to expect in cases of bankruptcy:
- You will be appointed a Director General of Insolvency (DGI), who will administer all your assets and manage it to repay your outstanding debts.
- You will be banned from travelling out of the country. Well technically you can still leave, but you’ll need the permission of the DGI or a court order. Your passport will be held by the DGI.
- Your existing bank accounts will be deactivated and you will be barred from withdrawing any money from your existing account.
- You will not be allowed to spend more than RM1,000 or get credit of more than RM1,000 from any creditor.
- You will not be able to work in certain professions which have restrictions imposed by professional associations or licensing authorities (e.g. lawyer, accountant, doctor, quantity surveyor).
- You will not be able to act as a director of any company.
- You will not be allowed to own a business (or be part of any business ownership), so you can forget about being an entrepreneur.
- You will have to sacrifice a certain percentage of your monthly income to the DGI to repay your debt.
Can’t pay off your loans? Here are some solutions to try.
Now, we know that the previous section was really dreary, but we hope that you’re reading this in time before things escalate to your breaking point. Here’s what you can do to cushion the blow, and hopefully get back on your feet again.
1. Use all the initiatives that you can get at the moment
By now we’re sure you’ve heard of the Covid-19 moratorium. From 1st April 2020 onwards, all banks will be offering postponement on loan and financing repayments over the coming 6 months. In other words, you won’t need to make your monthly loan repayments anymore till the end of September 2020. To understand more, read our Covid-19 moratorium guide here.
The government also introduced the Prihatin Rakyat Economic Stimulus Package 2020 in an effort to preserve the welfare and wellbeing of Malaysians. See if you are eligible for any of the benefits below:
A) Bantuan Prihatin Nasional
- RM1,600 for households with monthly income RM4,000 and below
- RM1,000 for households with monthly income of more than RM4,000 up to RM8,000
- RM800 for single individuals aged 21 years old and and above with monthly income RM2,000 and below
- RM500 for single individuals aged 21 years old and above with monthly income more than RM2,000 up to RM4,000 per month
B) Private Retirement Scheme (PRS)
Allows early withdrawal of up to RM1,500 from Private Retirement Scheme account B without tax penalty from April to December 2020
C) Exemptions on housing and business premise rentals
- Extend exemption of PPR rental to 6 months for 3,636 PPR houses under KPKT
- Deferment of 6 months rental for 4,649 units of rent to own houses (RTO) under KPKT
- Exemption of 6 months rental for 40,000 public housing tenants under DBKL
D) Cash assistance for e-hailing drivers
A one-off cash assistance of RM500 to full-time e-hailing drivers
2. Use EPF savings
As part of the Covid-19 i-Lestari Account 2 Withdrawal Scheme, you can now withdraw up to RM500 every month from your EPF Account 2, starting 1 April 2020. However, all EPF contributors must be below 55 years old to be eligible.
If you don’t fall into that category, don’t fret - you can still withdraw from your Account 2 for big-ticket purchases. While we’re unable to withdraw for debts from credit cards at this point in time, you can still use it to pay off some of your existing loans such as your mortgage and education (PTPTN). This will at least give you some runway space so you don’t default on your loans while trying to rebuild your income stream.
3. Consider a debt consolidation loan
Yep, it’s exactly what it sounds. The mother of all debts, the mega debt. But… why on earth would you want to take on another loan when you already have so much debt?!
Well, debt consolidation loans were made with a single purpose: to help borrowers get out of debt. Let us explain. Imagine if you could combine everything into one loan at a single interest rate. This, my friend, is called a debt consolidation loan.
Debt consolidation loans can oftentimes help with managing all your existing loans.
So, let’s say you have three credit cards with an interest rate of 15%, and each card has an outstanding of about RM5,000. To add to that, you have a personal loan worth RM50,000 which you’re using for your side hustle, and that has an interest rate of 7%. You also have your car loan to account for, and your total debt to date may round up to RM200,000 or so. (And this will only grow if you don’t make the minimal payments to each one of your loans.)
With a debt consolidation loan, you’ll get to simplify this mess by combining all your debts into one. Think of it as the bank buying all your existing debt from other creditors, and in exchange, you repay that total amount to only one bank. Not only is this a lot easier to manage, but it can even save you money in the long run if one of your debts has a higher interest rate.
It wouldn’t hurt to browse through some debt consolidation loans and calculate how much you need to borrow/return according to your ability - just head over here.
Read also: How do debt consolidation loans work?
4. Take advantage of balance transfers
This is kinda like a debt consolidation loan, only that this revolves around credit cards. Yes, credit cards still count as loans since you’re technically borrowing money from the bank to pay for stuff before you actually pay for them!
If you’re struggling to pay off your bills every month, you can combine all the debt from several credit cards onto one new credit card. Yes, we hear you. “Why sign up for another credit card when I already have credit card debt?!”
See, the end goal here is to use this card as your “debt holding” card. (And may we suggest that you put your other cards aside after performing a balance transfer until you have full control of your finances.)
With balance transfers, you can take advantage of a lower interest rate. Plus, some banks even offer a 0% interest rate if you can pay off your debt within a short amount of time (e.g. 6-12 months)! However, other terms may apply depending on the card issuer (e.g. paying a one-time fee of 3% on the balance transfer amount).
Read also: The Best Balance Transfer Plans in Malaysia
5. Discuss with your bank/lender
As simple as this sounds, yes, you can always bring your woes to your bank or lender. Tell them about your situation, and see how they can help you work around it. If you’ve been repaying your loans pretty consistently, you could have a better chance in winning their favour.
Your solution could be in the form of refinancing (basically readjusting your loan terms), or giving up your assets without foreclosing. If the latter happens, it would be wiser to give up your home without a taint on your records as you move to something a little more budget-friendly.
Regardless, just find time to speak to your creditors. At the end of the day, it’s their goal to get their money back… so they’ll do what they can to help you within their means too.
It’s entirely possible to repay your loans without defaulting
Even in trying times like these, it’s still possible to repay your loans without defaulting, as long as you keep a very close eye on your cash flow and commitments. If you’ve been recently unemployed, there are ways to work around your job loss in order for you to secure some financing help while you try to get back on your feet.
If you need some financial boost (with the confidence that you can repay responsibly, of course), you can always browse through some of the existing personal loans available now. There are some with interest rates as low as 3.27%, and there are loans for sums as small as RM1,000. Browse them all here.
However, if you need more help, you can always consider signing up for credit counselling. For starters, Agensi Kaunselling dan Pengurusan Kredit (AKPK) provides financial counselling sessions and debt management programs to Malaysians, all for free. If you have extra cash, you can even speak to a hired financial counsellor for some hands-on help to manage your repayment.