Jean’s

Upon reading my last article on effective interest rate , a close friend of mine asks me a question: -

If Mr. A has RM 100,000 cash, should he: -

a)    Pay off his car loan of RM 100,000, with interest rate of 2% p.a. for 5 years; or

b)   Continue with his car loan, and save the RM100,000 in Fixed Deposit (FD), with interest of 3.75% p.a.,

This is a common question when one reaches a stage in which they have some money left over and wondering whether they should use the money now earmarked for savings to pay off their debt faster. 

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A friend of mine received a call from a banker last week, offering him a low interest personal loan of RM 34,000 at 5.99% per year, with 5 years repayment terms.  The idea put forth to him was that he could use this RM 34,000 to repay part of his current RM 200,000 home loan, which had a 20 year tenure, which ultimately should help in saving his home loan interest. The reasoning was that the RM 34k if settled with the personal loan, would save substantial interests if it were continued to be paid over 20 years. 

With his current home loan interest of 6.5% p.a., he was quite moved by the offer, as from the initial sound of it, the personal loan of 5.99% might very well help to reduce the interest expenses by 0.59% p.a. for the next 5 years. 

Is that so?  

He came to me for an advice and I told him that he would not be saving any interest, but in fact would be paying much higher interest than he thought!!!

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