Bank Negara Hire Purchase Loan Deferment : What Changed?

Bank Negara “clarified” that they have always said that consumers would be charged interest during the hire purchase loan deferment.

Let’s find out if that is true, and if not, what’s changed…

 

BNM Loan Moratorium / Deferment : What Is It?

On 24 March 2020, Bank Negara Malaysia announced that they would be implementing additional measures to help borrowers during COVID-19 pandemic.

One of these measures is an automatic loan moratorium or deferment for six (6) months.

Bank Negara Hire Purchase Loan Deferment : What Changed?

To ease the cash flow of small and medium-sized enterprises (SMEs) and individuals that are likely to be most affected by COVID-19, banking institutions will grant an automatic moratorium on all loan/financing repayments/payments, principal and interest, (except for credit card balances) by individuals and SME borrowers/customers for a period of 6 months from 1 April 2020. The automatic moratorium is applicable to loans/financing that are-

(a) not in arrears exceeding 90 days as at 1 April 2020; and
(b) denominated in Malaysian Ringgit.

 

Bank Negara On Hire Purchase Loan Deferment : TLDR Summary

When I first wrote my opinion on the hire purchase loan deferment, it seemed clear – the hire purchase loan deferment would incur NO ADDITIONAL interest during the 6 months moratorium.

After all, hire purchase loans are fixed rate – the interest is calculated at the beginning, and added to the loan, before the full sum is divided to arrive at your monthly instalment.

Because the interest is already fixed and not dependent on the outstanding principal, the interest will not accrue during the hire purchase loan deferment.

While Bank Negera Malaysia’s own FAQ initially supported this (see timeline below), they have now clarified and changed their FAQs :

  • Banks will be allowed to charge interest on hire purchase loans during the loan moratorium
  • Banks will offer you the option to pay all 6-months deferred instalments PLUS interest at the end of the loan moratorium.
  • Alternatively, you can stagger the repayment of the total deferred instalments PLUS interest over the extended loan tenure.
  • Finally, you can opt-out of the hire purchase loan deferment now to avoid paying additional interest.

 

Bank Negara On Hire Purchase Loan Deferment : Timeline

27 March 2020 : No Additional Interest Charged During Deferment

In their FAQ that was revised on 27 March 2020, Bank Negara Malaysia specifically pointed out that “no additional interest / profit [would be] charged during deferment“.

16. What would my HP financing monthly payments look like before and after the 6 months moratorium period?

Monthly Instalment before deferment Monthly Instalment after deferment
RM1,133 RM1,133
If tenure post-deferment extended 6 more months

This illustration is based on a fixed rate HP loan, with these assumptions:

  • Loan/financing amount – RM90,000, flat interest/profit rate – 4%
  • Original tenure – 9 years, borrower/customer has repaid for 3 years
  • Outstanding loan/financing amount before and after deferment
    period – RM81,600
  • No additional interest/profit charged during deferment

21 April 2020 : Section Deleted

The Bank Negara FAQ on the loan moratorium was suddenly revised on 21 April 2020, and the entire section above was removed.

BNM Change In HP Loan FAQs

30 April 2020 : Bank Negara Malaysia Announces Clarification

On 30 April 2020, Bank Negara clarified the operationalisation of moratorium for hire purchase loans and fixed rate Islamic financing.

In the press release, they (kind of) announced that banks would be allowed to charge interest during the moratorium.

Banking institutions will also provide to each borrower/customer specific details of changes to the terms of his/her HP loan or fixed rate Islamic financing agreement. This should contain information on the revised payment schedule and any changes to payment amounts, including those arising from normal interest/profit rate accrued during the moratorium.

1 May 2020 : Correction + Clarification

Bank Negara Malaysia followed up with a new FAQ to clarify and correct their earlier FAQs. Buried right at the bottom was this :

16. Following this announcement by BNM, I feel short-changed. I thought the repayment terms on HP and
fixed-rate Islamic financing after the payment deferment period ends are not supposed to change.

Will I now lose out from benefitting from the six-month payment holiday?

We sincerely regret any confusion and anxiety that this announcement may have caused.

The deferment package is meant to ease cash flows for borrowers/customers who are affected by the COVID-19 pandemic. This intent remains the same.

The confusion arises because of the perception that under the HP loan, the amount repaid cannot be changed. This misperception also arose to some extent from our earlier illustration where we made certain assumptions and
caveats. We removed this example from BNM’s FAQs when banks provided their own illustrations in their FAQs. BNM’s illustration was not intended to preclude interest/profit rates to accrue over the deferment period.

Borrowers/customers whose HP loans and fixed-rate Islamic financing accounts that have been automatically deferred since 1 April 2020 will continue to benefit from the payment deferment until 30 September 2020.

Borrowers/customers can still change their earlier decision to take up the deferment if they do not wish to pay any additional interest/profit.

Bank Negara Malaysia also provided a new illustration on how much additional interest we would need to ultimately pay for the deferment :

Here is an example to help you better understand the financial impact post deferment.

In this example, the change to the monthly instalment is not as large as expected. This illustration relates to a RM50,000 HP loan with a remaining tenure of 5 years and a flat rate of 2.71% per annum (or an effective interest rate of 5.36% per annum).

Before deferment After deferment
Monthly Instalment RM 712 RM 731
Increase In Monthly Instalment RM 19
Increase In Total Interest Charges RM 1,130

In this example the monthly instalment amount increases by about 2%, or RM19 a month.

The above example assumes the borrower has chosen to stagger the repayment of the total deferred instalments over the remaining extended tenure of the loan when monthly repayments resume in October 2020

However, some banks may instead provide borrowers/customers the option of repaying the total deferred instalments, including interest, as a lump-sum settlement during the final monthly instalment at the end of the loan/financing tenure. In this case, there will be no change in the monthly instalment amounts paid by borrowers/customers when the monthly repayment resumes in October 2020.

 

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