Debt trap: How lifestyle loans are driving bankruptcy

SHAH ALAM – It has become a common culture among Malaysians especially the younger generation to spend based on lifestyle trends rather than their financial capability.

This behaviour has led many to become trapped in a cycle of debt addiction.

The ease of obtaining loans, coupled with the access provided by financial institutions, was one of the main reasons why individuals found themselves caught in an endless debt trap.

A fitting analogy portrayed financial lenders as ‘drug dealers’ offering loans to consumers.

An industry expert said that three major financial products drove the increase in bankruptcy cases in Malaysia were personal loans, vehicle hire purchase and credit card debt.

“If we rank them by profit margin, credit cards come out on top, followed by personal loans and car loans. Only after these do we see more productive loans such as home loans.

"In retail banking, about 20 to 30 per cent of loans are unproductive, including personal loans, hire purchase financing and credit cards. Therefore, as commercial entities, banks aim to sell high-margin products but must also strike a balance.

"In this case, who should oversee and check these businesses (banks)? The answer is Bank Negara Malaysia (BNM), which acts as the regulator to maintain this balance," he said.

The situation was further aggravated by banks allowing another product, which was debt consolidation loans, which enabled individuals to combine several debts into a single larger loan.

“For instance, if someone has a credit card, housing and car loans, they can combine all these into one larger loan. However, at this point, they should not be taking on another significant loan to settle old debts.

"BNM should make it mandatory for such individuals to be referred to the Credit Counselling and Debt Management Agency (AKPK) because the debt addiction has reached an alarming level," he said.

If they were referred to AKPK, they would not be allowed to take on any new debt as they would be under the agency's supervision.

"Many people do not fully understand this situation because BNM has a recovery centre, yet they still permit individuals to take on large debts just to pay off old loans. This ongoing scenario has caused growing concern in society," he said.

He added that BNM must also take a more proactive role in addressing bankruptcy issues, particularly among the younger generation.

“They need to tighten financial regulations so that every individual has a specific credit card limit. Continuous debt consolidation loans should not be allowed and those involved should be required to go to AKPK.

"BNM needs to implement control measures to foster a generation with financial literacy. This includes building a culture of saving and investing, rather than just spending,” he emphasised.