24% interest rate for co-op loan

Cooperative members may find it easy to get loans but these loans can be very expensive.  For one cooperative member, the interest rate is as high as 24% per annum.  

The loan is expensive because the cooperative deducts “cost of loan 19% from the principal”.

Members who sign up know very little about what they are getting themselves into. Not only do they sign blank forms but they also do not even have a copy of the agreement.

In one case, a member applied for a RM80,000 loan by signing a blank form. No explanation was given as to why the sum that he eventually received was only RM33,995. He was also not given a copy of the loan agreement.  

After the matter was brought up with the Malaysian Cooperatives Commission (SKM), we received a reply giving details of the loan and a copy of the loan agreement.

Based on the table, the loan amount is RM42,000. The interest rate is 10% p.a. and when calculated on the principal of RM42,000, the total interest to be paid  is RM29,400.  

When interest for the tenure of the loan is calculated based on the original sum borrowed, it means that the borrower is partly paying interest for money that he has already repaid.   Since instalment is paid every month, interest should only be charged on the monthly reducing balance.

Taking into consideration that the interest to be paid on a RM42,000 loan is RM29,400 then the real interest rate is 17% per annum.

However the interest rate actually paid by the borrower increases because of the 19%  deducted from  the loan. Thus the borrower only gets  RM33,995.

When the borrower pays interest of RM29,400 on a RM33,995 the real interest on his loan jumps to 24% per annum.  

What was the 19% deduction? If it is commission for the cooperative then it  is extremely high  and   that could be the reason why the cooperatives encourage their members to take up loans.  

The cooperative may argue that the commission goes to the cooperative and ultimately (in theory) it goes back to its members.   However, the high interest rate is an unnecessary burden on the borrower.  

To protect members the SKM should see to it  that the cooperatives charge only a nominal sum for  arranging loans.

Details of the Loan of RM42,000

Monthly instalment     RM850  (84 months)

Loan amount      RM71,400

Principal      RM42,000

Interest rate       RM 29,400  (RM 42,000 x 10% x 7 years)

Deduct cost of loan 19% from the principal        RM7,980

Deduct (fee RM5 + share RM20)     RM25

Total cash received by borrower     RM33,995