How effective interest rates, impact on cash flow, and future loan opportunities can affect one’s debt repayment decisions.
If you received a five-figure bonus, which would you pay off first – your car or your home? He bought his car five years ago with a nine-year loan worth RM45,000. He incurs as high as 3% in flat interest per year.Meanwhile, Ben bought his property two years ago with a 35-year home loan worth RM350,000. The interest rate is 4% per year.Recently, Ben received a three-month bonus worth RM24,000. He plans to utilise this to pare down his debt.
By doing so, Ben would learn that his 3% in flat interest rate is equivalent to 5.5% a year in effective interest rate, which is higher than his home loan. So, Ben needs to know the effective interest rate on which he could save by settling his car loan balance of RM22,972.48: But, he is required by his bank to continue paying monthly instalments of RM1,648.22. Therefore, the impact to his cash flow would be negligible as Ben would still need to keep paying both his car and home loan instalments.invest or contribute to his EPF;buy insurance and buff up his financial protection; orAssume banks allow you to service debts up to 60% of your monthly income, and that every RM1 in debt instalment is the equivalent of RM200 in home loan.
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