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Don't get crushed by mounting credit debt

The overall quality of life in the Kingdom has been rising steadily for the past decade and many Cambodians, particularly in urban areas, could be called new middle class, or, at least, they have enough income to make discretionary purchases for the first time in generations. With the rising availability of credit and loans to middle-income families for the purchase of items such as motor-bikes and cars, consumer culture of the western variety is catching on. But while buying with borrowed money might promise to lift your lifestyle overnight, poor financial planning can lead to a crushing  debt and a lifetime spent struggling to get back in the black. Lift senior reporter Sun Narin tries make sense of the risky business of borrowing, before its too late.

With the emergence of modern motorcycles like the Fino or Scoopy, who can resist buying one? Hay Chearin, 31, wanted to buy one for his brother,   a student who couldn’t afford it himself, but he too did not have the cash. Luckily (for now) he was able to pay US$500 up front and take out a loan on the rest of the $1,700 price tag.

The rest he plans to pay by the month, and he has been given a certain time period to complete these payments. If all goes well, he will pay $67 per month to the shop owners for about two years.

“I am happy that I could buy it, even though I didn’t have enough money,” he said.

In order to fulfil a client’s demand and ease the means of buying vehicles for people with steady, middle income, jobs, motorcycle and car shop dealers are cooperating with banks to provide credit lines directly to customers, who often have limited savings or relatively low-income employment.

The motorcycle shop Yamaha Town, which is in front of Batouk high school, worked with Cambodia Mekong bank to set up a system in which their customers, who are oftentimes teenagers, can drive away with a new Yamaha today and pay for most of it later.

A Yamaha Town customer service representative said: “there are a lot of customers interested in this system since it is easy for them to buy a motorcycle, even though they have a tiny amount of money.”

As a policy, Yamaha Town said their customers must pay at least 30 percent of the total retail price as a down payment and the remainder must be paid within two years. Customers are also required to have a minimum salary of $200 per month and the proper paperwork to prove it. The customers are charged 1.5 percent interest per month, or 18 percent per year, which is easily preferable to the 29 to 34 percent annual interest rate currently being advertised by ACLEDA for a comparable loan.

For any customer with a tight budget, the plan presented by Yamaha Town, and other retailers of motos and cars in the Kingdom, is ideal. It might take a bit of discretion, the optimistic customer thinks, but self-control is easy enough. Most people who borrow money, in Cambodia and around the world, are able to repay their debt. But what if they can’t? For ACLEDA, this situation raises a difficult series of decisions. Friendly letter, if unreturned, may turn to less friendly phone calls and eventually, if the borrower fails to make payments on time, they risk losing their moto, car, house or even their land, which is still the preferred collateral by any lending institution in Cambodia.

So what about Yamaha town, do they have credit officers to make sure that indebted customers are staying on track? When asked about the stores policy on such matters, Yamaha Town’s representative said that Mekong bank was responsible for any complications that occur after the sale.

In a practice that is common among lenders, the smaller firm, in this case Yamaha Town, passes on outstanding loans to a larger financial services firm, Cambodia Mekong Bank, which is better equipped to incur temporary losses and recover their money if borrowers fail to pay back their loan.

For Yamaha Town, the fact that the bank is essentially buying their inventory, rather than the customers, is irrelevant. And for Cambodia Mekong Bank, the worst case scenario is one in which they are forced to cease the assets of the borrower, who they have never met and, given the small size of their loan, promise to contribute little to the banks multibillion dollar portfolio.

Similar credit structures have also been taken up by a number of car dealers. Sean Sophorn, who is in charge of information service at World Trade Transport which is applying the loan system, said customers who want to buy cars with a loan will be charged interest of 1.5 percent per month. Customers have to be earning a stable salary of at least $300 per month.

“A lot of customers get a loan at my company since they can pay the deposit with the money they have,” she said.

A government official who bought a car with a loan last month and wanted not to be named said he is happy with the system since he can use the car to drive to his workplace.

“I can take some of my salary to pay monthly, [but] the interest rate on the loan seems to be a bit high,” he said.

Banks play an important role in the process. ACLEDA bank, which has been applying the system since early 2010, has loans for cars to satisfy its customer’s needs.

“The clients can buy a quality car and can use it while they do not have enough money. We have networks with some car dealers,” said ACLEDA Executive Vice President So Phonnary. He added that clients can borrow a maximum of $10,000 and the interest is from 1 to 2 percent per month.

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