The Consumers Association of Penang (CAP) said there were more than 20 financial institutions and cooperatives that provide loans to civil servants.
These institutions then deduct from their monthly salaries in order to repay the loan, it said.
“Unfortunately, these financial institutions and cooperatives often do not cross-check the background of their applicants.
“Therefore, an applicant who is eligible for a RM50,000 loan could apply to four financial institutions and end up borrowing a total sum of RM200,000,” CAP president SM Mohamed Idris said in a statement.
Some applicants also faked their salary slips to obtain loans for which they were not qualified, he added.
He also warned that while automatic salary deduction was an easy way to recover the loan, it encouraged government servants to spend beyond their means.
“The situation of civil servants having to take loans has been blamed on the escalating cost of living.
“Although this might be true, they have to learn to live within their means because taking loans will only worsen the situation as they have to service the loan and the interest which has a cumulative effect.”
In September last year, the insolvency department said 294,000 Malaysians were embroiled in bankruptcy cases due to their failure to settle hire purchase loans, credit card loans, personal loans, housing loans and social guarantor debts due to errant debtors.
According to the department, 70% of bankruptcy cases involved individuals between the age of 35 and 45, with 8,000 to 20,000 individuals declared bankrupt for various reasons every year.
Idris said many Malaysians also stretched their budgets beyond their means by taking vehicle, housing or higher education loans.
The “debit card” feature on ATM cards also exposed individuals to overspending unless they were adept at balancing their accounts, he said.
Likewise, many consumers fell into the “financial trap” of online shopping, which allowed them to make purchases without feeling the immediate effect on their budgets.
“At the next pay day, they may just pay the minimum required by the bank and thus interest is charged on the balance that they owe while they continue with their spending habit.
“Under such circumstances, they dig themselves deeper into a debt that they have difficulty extricating themselves from.”
He also noted that there were some 3.6 million credit card holders in Malaysia with a total credit card debt of RM36.9 billion as at June 2017.
“There is little surprise that three out of five people prefer to use the credit card despite job and economic uncertainties because it allows a person to spend ahead of their earnings,” he said, warning however that the consequences could be disastrous.
Those who were unable to obtain loans at financial institutions might also turn to loan sharks or “Ah Longs” in order to get the money, he said.
“If they approach Ah Longs for loans, then they expose themselves to a different set of problems such as high interest rate, harassment and threats.”