Jean’s

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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I was always very skeptical about debt and preferred to remain debt free. Until one day a friend of mine told me that he LOVES debt if it is a ‘good’ debt. His statement became a wake up call for me.

He is right! Debt is not always a bad thing. In fact, there are instances where the leveraging power of a loan actually helps put us in a better overall financial position

The problem is it’s far too easy to spend more than we can afford, especially when we pay by credit card. And the risk would be we let debt get out of hand. On the other hand, avoiding debt at any cost is not smart either if it means depleting our cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money we do borrow.

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