Yesterday, I went to two banks to inquire about mortgage. I wanted to find out how much loan I am eligible for so I could budget for a property early next year.

Both the banks, in their computations, used 70% of my gross salary as the maximum repayment I could afford with the condition that I put up 20% of the property value as down payment. Could the banks be serious? If my gross salary is $1,000 then the bank would be willing to loan an amount whereby my monthly repayment will equal $700. This is insane.

The statutory retirement contribution is 11%. Tax is about 13%. This leaves me with about 76% take home pay. If my mortgage repayment is 70%, I will only be left with 6% to survive and pay my bills. Could people really live on only 6% of their gross pay? I suppose you could if your paycheck is enormous. However, I doubt the poor and middle class could.

The banks are encouraging people to spend beyond their means. No wonder the credit crunch has such a huge impact on the economy. Because people were spending and living on credit. Once the money supply (or credit) is cutoff, people have nothing to spend with.

We should not overstretch ourselves when buying properties. Else, we would be slaves to the bankers.

The illegal Chinese money lenders, better known as loan sharks, have a saying “Loan 9, collect 13.” This simply means giving out a loan of RM9, charge an interest of RM4 and collect altogether RM13. The interest works out to be 44%.

Guess what? The banks charge an even higher interest. The following is a screenshot of an advertisement by a local bank. It is in related to the personal loan promotion offered by the bank.

An advertisement of personal loan by a local bank.

You borrow RM5,000. You pay RM133.33 for 5 years. Your total repayment works out to be RM8,000. Yes, RM3,000 goes to pay interest which is about 60% of the principal you borrowed.

I too was a victim of personal loan. About 4 years ago, I took out a personal loan on my Citibank credit card through their “Phone a Loan” program. The tenure was for 12 months. The interest was high. I wanted to pay off this loan early to avoid further interest. However, upon my early settlement, the bank insisted on charging me for ALL FUTURE INTEREST that would have accrued if I had not paid off the loan early. Can you imagine that? I wrote to the bank threatening to bring the matter up with the Consumers Association but the bank did not waive the “interest”. The bank basically bullied me into paying them. I canceled the Citibank credit card immediately.

This simple advertisement and my painful experience with Citibank show how foolish it is to fall into the trap of a personal loan. However, we still fall into this trap because of a lapse in judgment or temptation for the hassle free, easy and readily available money.

Bottom line, if it is too good to be true, it usually is. It may seem a like a good deal when the loan is processed with virtually no hassle in paperwork. However, the interest rate will be high and it may be too late when we realize and feel the pain in our wallet.