This report analyzes and discusses about characteristics together with advantages and disadvantages of different kinds of credit/loan for a child's education funding. The best form of education loan to be used for child's education funding will be fixed deposit. This is because if borrower or in this case a parent aren't able to support the child's education fund, a 3rd party can deposit their money as a guarantee to the bank. The loan amount is doubled the money deposited. Depositor can also enjoy the 4% interest on the amount deposited annum.
The interest on the loan is also lower then the other education loan. Loan tenor can be up to 12 years or 60 years of age. Personal loans can be a sensible way to borrow a substantial sum over a term of between, say, one and five years. But they can be expensive, and they are not so good when you need flexibility or a short-term credit facility. Watch out for lenders trying to persuade you to add to your loan half-way through. Whereas for property loan, if property is fully paid up. Property can be charged to the bank and do not have to tie up extra cash.
Interest paid is half the amount as compared to personal loan. Several recommendations are outlined in this report which is The Personal Financial Planning Process and The 5C's Credit Analysis. These will help assist parents to be financially ready for education funds for their children in the future and things they will take into consideration before approving a loan. INTRODUCTION Research Problem This business report critically analyzes and discusses the types of credit or loan a consumer may source for a child's education funding of a degree program for 3 years costing $36, 000.
The characteristics as well as the advantages and disadvantages of the credit/loan will be critically analyzed. Limitations There are 2 limitations in this report. Firstly, the secondary sources are limited in the college library, e-brary and public library. Sources that are available there are too advanced for this assignment. Secondly would be the primary sources, there's a very limited time interviewing the banker due to busy working hours. Sources of data Primary data has been obtained in this report through a direct interview with a personal banker of a bank.
As for secondary data, data's are obtained from references of some text books, broaches and websites. Report Organization 3 various types of bank loans are discussed in this report, requirements needed and details about the various types of bank accounts are also stated in the discussion section. The report concludes with a recommendation on a type of bank loans to be used including advantages and disadvantages of various bank loans. DISCUSSION CREDIT FOR CHILD EDUCATION FUNDING Types of Loans
According to Anne Teng, personal banker of RHB Bank, she suggested 3 types of loan which are: Personal loan, Property loan (Appendix 1) and Fixed Deposit (Appendix 2) 3. 1 Personal Loan A personal loan can be used for child's education funding but only in 2 conditions. The child must have a CTLA (Insurance on Student Credit Term Life Assurance) from RHB Bank and a Co-borrower. CTLA is for assurance of loan and the premium of student (borrower) is calculated by age for example 19years, will be $136. 80 for $36, 000 loan of 5 years loan tenor.
A Co-borrower must be an immediate family which has a constant income. The co-borrower must have the ability to pay up the installment of the total amount of loan which is $803 or at least $3, 200 less then 33% of income. This loan will have an interest rate of 12% per annum on a reducing basis. The processing fee cost $100 through installment and not upfront. Interest of loan will not be applied on the processing fee. Loan tenor must be at least 2 years and up to 7 years. For example if the parent apply for 5 years with a loan of $36, 000.
For the 1st month he will have to pay up a fee of $803 (principle + interest) and for following installments, the interest will be paid according to the reduced principle. In 5 years (60 months) if $803 or more is paid regularly, will result to early settlement by 6 months and the parent will have to pay $100 or 1% of overall loan amount. (Rashid Hussein Bank, 2006) Advantages There's a fixed repayment schedule, debts will be paid off within a set time, as long as payments are met together.
This loan may be more suited to borrowing larger sums, over a longer term, than overdrafts or credit cards. Disadvantages It is Inflexible, installment must be paid back each month, even when money is tight. 3. 2 Property Loan A property loan is to charge a property which will cost more then the loan amount. The parent can loan not more then property value and up to 30 years tenor or until the age of 60 years. The minimum loan will have to be at least $20, 000 and maximum would be $500, 000. The interest Base Lending Rate (BLR) is 6. 75% with an additional 1. 25%.
(Rashid Hussein Bank, 2006) Advantages If property is fully paid up, property can be charged to the bank and you do not have to tie up your extra cash. Interest paid is half the amount as compared to personal loan. Disadvantages If loan is not fulfilled, bank will take over the property to be sold in order get the total amount of loan back. 3. 3 Fixed Deposit To use a fixed deposit for child education funding, the child must have a 1st party (immediate family) or a 3rd party (anybody). The party must have a fixed deposit account with minimum $20, 000 - $60, 000 deposited in the account.
The party is able to loan double the Fixed Deposit amount. Once money is deposited, the loan is immediate but a payment of BLR (Base Lending Rate) total up with 1. 5% must be paid upfront. Fixed Deposit can be placed minimally for 12 months deposit or until loan is paid up and interest rate will be 4% per annum (12months). Loan tenor can be up to 12 years or 60 years of age. Handling fee is $200 or 1% of loan amount. (Rashid Hussein Bank, 2006) Advantages If borrower or in this case a parent aren't able to support the child's education fund, a 3rd party can deposit their money as a guarantee to the bank.
The loan amount is doubled the money deposited. Depositor can also enjoy the 4% interest on the amount deposited annum. The interest on the loan is also lower then the other education loan. Loan tenor can be up to 12 years or 60 years of age. Disadvantages if the borrower isn't able to pay up the total amount of loan, the 3rd party will have to be responsible. RECOMMENDATION Several recommendations are suggested in this report. Firstly among the 3 plans suggested, fixed deposit is recommended for child education funding.
A 3rd party can deposit their money as a guarantee to the bank. It has more flexibility for the parent if they are unable to support their child's education fund due to insufficient money or is in heavy debts. Besides, it allows borrower to have a maximum loan doubled the money deposited. Depositor/ 3rd party can also enjoy the 4% interest on the amount deposited per annum. The interest on the loan is also lower then the other education loan. Secondly, it is recommended that The Personal Financial Planning Process and The 5C's Credit Analysis are being used by the parent.
These will help assist parents to be financially ready for education funds for their children in the future and things they will take into consideration before approving a loan. (APPENDIX 3) A well-designed financial plan can help you do just that and, along the way, give you a greater sense of financial security. (Ykconsultancy) The benefits of a solid financial plan certainly seem to be valuable. The question now is how to put them in place. Financial planning is an on going process that changes as your financial situation in life change.
(Keown, ND) There are 5 simple steps to personal financial planning which are evaluate your financial health, define your financial goals, develop a plan of action, implement your plan, and review your progress, reevaluate and revise your plan. (APPENDIX 4) "The basic elements of personal financial plan include cash flow/budgeting analysis, insurance needs, employee benefits, education funding requirements, investment decision, analysis of debt, portfolio analysis, retirement planning, forecasting retirement benefits and costs, income tax planning, and estate planning.
" (Shippensburg University) With proper financial planning, the parent would have enough cash for his child's education when it is needed. Your bank is in business to make money. Consequently, when a bank lends money it wants to ensure that it will be paid back. (SBA, United States Small Business Association) One of the many tools of lending is the 5C's of credit, and the initial evaluation of any loan application. (Tale'awtxw Aboriginal Capital Corporation) The 5C's are capital, collateral, conditions, character, and capacity. (APPENDIX 5) CONCLUSION
For child education funding, fixed deposit is the best plan to be used. Fixed deposit has the lowest interest rate of BLR+1. 5% compared to personal loan with an interest rate of 12% per annum on a reducing basis and property loan with an interest rate of 8%. Property loan in this case is not really suitable for education funding of RM36, 000 for 3 years. This is because property loan is used only if the borrower wants to loan a big sum of money. Whereas for personal loan, it is Inflexible because of high interest rate and installment must be paid back each month, even when money is tight.
On the other hand, fixed deposit has a lower interest rate and if the 2nd party isn't able to support the child's education fund, a 3rd party can deposit their money as a guarantee to the bank. Therefore it also has a benefit of 4% of interest per annum that depositor can enjoy. However, the 5C's of credit must take in consideration before making a loan. Without this, banks would not give you the loan. Finally, financial planning must also be made by the parent to be financially secured or in other words, have enough money for future plans or goals.