The Employees’ Provident Fund (EPF) has devised a mechanism for members to get financing without depleting their retirement savings. But the question remains: should you use your EPF savings to apply for a personal loan?
This article will explore more about this alternate route for personal financing to help you make the right financial decision for your short- or long-term needs.
What is the Account 2 Support Facility in Malaysia?
In Malaysia, EPF has introduced the Account 2 Support Facility, which enables members to use their savings in EPF Account 2 as collateral when applying for personal financing from banks.
Here are some of the essential things you should know:
Launched on April 7, 2023, Phase 1 is open to EPF members aged 40-55 for one year.
Further details and the starting date for Phase 2, which caters to members below the age of 40, will be announced at a later date.
To be eligible for the Account 2 Support Facility, members must have a minimum of RM3,000 in their EPF Account 2.
2. Application Process
The application process for personal financing through this facility will be administered by banks. This includes financing assessment and credit framework.
Members who wish to apply for personal financing can do so online through participating banks.
Plus, members must verify that they meet the necessary qualifications in EPF Account 2 before applying.
Applicants must adhere to the agreed terms and conditions set by the financial institution when submitting their application.
Following approval, members are permitted to proceed with an initial application for Age 50 or Age 55 Conditional Withdrawal to the EPF based on the approved financing amount.
3. Loan Details
The maximum financing amount is capped at RM50,000, depending on the borrower’s Account 2 balance.
The duration for repayment can extend up to 10 years. Participating banks in this facility will apply interest rates (conventional) or profit rates (Islamic) between 4% to 5%.
The rates are lower and more economical as opposed to the prevailing market rates of 8% to 15%.
4. Withdrawal Mechanism
When a member requests an advance notice for withdrawal at 50, the EPF will transfer the original sum and the dividends accrued in Account 2 to the member’s loan account at the bank.
This can occur at any point when the member is between 50 and 54 years old, with the option to extend the repayment tenure for up to 10 years.
And if a member chooses to withdraw at 55, the EPF will deposit the initial investment and the dividends earned in Account 2 into the member’s loan account at the bank when they turn 55.
The remaining funds, after the personal loan balance has been cleared, will be given back to the member.
What are the Benefits and Risks of Using Your EPF Savings to Apply for A Personal Loan?
Using EPF savings as collateral for personal loans, as proposed in Malaysia’s Account 2 Support Facility, can have benefits and risks. Let us examine the pros and cons below:
- Access to Credit
This facility can provide access to credit for EPF members who are ineligible for traditional personal loans because of poor credit scores or other barriers.
It can also be a lifeline for individuals who are unemployed yet have accumulated substantial savings in their EPF accounts.
- Preservation of Retirement Funds
By using EPF savings as collateral, members can access their funds temporarily. This is unlike standard EPF withdrawals that reduce their retirement funds permanently.
This approach provides you with a financial cushion, allowing you to tackle immediate monetary needs without depleting your retirement savings.
- Potential for Lower Interest Rates
Loans backed by EPF savings typically carry lower interest rates compared to unsecured personal loans, offering a more cost-effective borrowing option.
The favourable interest rates enhance the appeal for members seeking a less expensive borrowing route.
- Loan Repayment Obligation
It’s crucial to ensure that you can fulfil loan repayments before opting for this borrowing option.
The loan must be repaid with interest, and failure to do so would potentially lead to losing a significant portion of your EPF savings.
- Impact on Retirement
While using your EPF savings to apply for a personal loan lets you preserve your EPF savings, this doesn’t negate the need for proper retirement planning.
If you consistently rely on your EPF funds as loan collateral, this can derail your long-term retirement goals.
- Potential for Debt Spiral
You should carefully consider and take caution when borrowing against EPF savings, especially considering the current economic conditions in Malaysia.
The economic uncertainty and fluctuating interest rates may make loan repayment difficult, potentially ensnaring some members in a relentless cycle of debt.
- Reduced Dividends
The increase of members accessing their EPF savings for loans might compromise the EPF’s capacity to generate lucrative dividends for its members.
Due to extensive borrowing, the reduced fund size could lead to a lower overall dividend rate and returns for those who maintain their investments in EPF.
Should You Use Your EPF Savings to Apply for A Personal Loan?
Whether you should use your EPF savings to apply for a personal loan depends on your specific financial circumstances, loan purpose, and eligibility.
Here are some situations where a loan may alleviate your financial burdens:
1. Emergency Expenses
It can be helpful if you’re facing urgent financial needs, such as unexpected medical costs or crucial home repairs.
The facility provides swift access to funds without permanently reducing your retirement savings.
2. Temporary Financial Hardships
It offers a temporary financial buffer for those facing sudden money troubles, such as job loss or unexpected bills. This helps them address short-term cash flow problems.
3. Avoiding High-Interest Debt
Individuals looking to borrow money but want to avoid high-interest debt can consider this financing option.
Using your EPF savings as collateral for a loan would provide lower interest rates compared to unsecured personal loans or credit cards.
How Bluebricks Can Help You
We hope that this article has helped you decide whether or not you should use your EPF savings to apply for a personal loan.
As an experienced bank loan and debt consolidation agency, Bluebricks provides a comprehensive list of services, including:
- Personal loan services
- SME loan rejected services
- Mortgage loan rejected services (for buying a new home, refinancing and cashback purposes)
- Collateral loan services
Professional Loan Consultancy Services
Exploring the multitude of financial products in the market and comparing them between banks and lenders can be confusing.
At Bluebricks, our loan experts will help advise and guide you in selecting a suitable loan product based on factors, including:
- The specific loan amount you require.
- The urgency with which the loan amount is needed.
- Whether you or your parents own a property that has been held for over ten years.
- Your income level.
- Your CTOS score (such as your credit score and credit history).
Should You Use Your EPF Savings to Apply for a Personal Loan – FAQs
Leveraging your EPF savings to apply for a personal loan is not a decision to be taken lightly.
It’s important to consider the immediate financial relief it may provide and the long-term implications for your retirement security.
Check out some of the commonly asked questions and answers to help clarify your doubts.
Applying for a personal loan using EPF savings as your collateral can help you obtain the necessary funding without depleting your EPF savings.
However, missed or late repayments will affect your credit score. Moreover, defaulting on your personal loan may cause you to lose a large portion of your retirement savings.
Before applying for the Account 2 Support Facility, consider your long-term financial goals, alternative funding options, the impact on your retirement savings, and the terms of the loan, such as the interest rate and repayment schedule.
Aside from using your EPF savings to take out a personal loan, consider taking an unsecured personal loan from a bank, borrowing from friends or family, or refinancing your property.