SMART MONEY SERIES:
We looked at the burden of having too much debt and suggested some smart ways of managing them last week.
This week, we will learn how to manage loans, especially home mortgage and car loans, which probably form the bulk of our loans. Ultimately, we want to be able to live in peace and to be truly free from debt stress.
Should you take a loan?
Now, most of you may think the question is absurd and may be saying to yourselves: “What, you expect me to buy my house and my car with cash?”
But before you flip the page, let’s try to understand some basic principles about taking on a loan.
First of all, we have to be aware that “the borrower is the slave of the lender". Wow, are you aware of this?
When we borrow, we are at the mercy of the lender and we would have to work very hard throughout our lives just to settle our debts. We would have to sacrifice precious time with our loved ones and forego pursuing our own hobbies because we have to put in longer hours at work.
Why? Because we have loan commitments. In essence, most of us, irrespective of our professions, are working for the banks.
Secondly, we should “never go into debt for anything that you don’t expect to appreciate in value". This is a good principle to follow the next time you intend to take a loan.
Take, for example, your car. There are so many young people who can’t wait to get behind the wheel, and not just any wheel. Their cars must be trendy, stylish and sporty.
It’s truly amazing how a fresh graduate could afford a brand new car, but wait... you don’t even need to put a down payment these days! Just vroom the car out of the showroom and pay later, goes the marketing pitch.
Do you know that the value of the car drops by 10-20 per cent the moment it leaves the showroom?
If you really “need” to get a car, buy it with cash. Otherwise, there’s always the LRT, buses or car-pooling (This can help reduce traffic jams, as well.)
Having said that, there may be times when taking a hire-purchase to finance your much needed car is warranted.
There are manufacturers who may want to clear their existing stock and offer very attractive financing schemes.
You would have to compare the cost of borrowing with what you can earn from your savings/investments.
However, hire-purchase rates are never the same as bank interest rates. A good rule of thumb would be to double-up what you’re offered as your financing charge.
So, remember this: for hire-purchase rates, what you see is not what you pay!
Do you own your home?
Now, let’s take a look at our dream home. It’s probably the single largest loan for most of us. We have to consider carefully before committing to one.
As mentioned last week, not many of us are able to buy a house outright with cash.
Instead, we apply the 90/10 formula — 90 per cent loan, with 10 per cent down payment for the purchase of our home.
Unless you’ve bought your home outright with cash, you can’t really say that you own your home. You may have a home but not own it, at least not yet.
Technically, the bank owns your home until you’ve fully settled all your loan obligations. Only then, the legal ownership of the house reverts back to you.
To purchase a house, it’s seldom feasible to buy it outright with cash and it’s quite all right to take a loan.
This is because a house will, in most cases, appreciate in value over time and is generally a good hedge against inflation.
However, you would have to ensure that your monthly instalments are not too burdensome to the point that it affects more important areas of your life.
It would be meaningless to be living in your dream home but having to constantly worry about how you’re going to make the next monthly instalment.
Remember, our ultimate goal is to be able to live in peace and be free from debt-stress.
The sooner the better...
The sooner we are able to pay off our mortgage, the faster we will be able to live in peace and be free from debt-stress.
In the process, we will be able to save thousands of ringgit in interest charges (which you can use to buy your car!)
So, how can we pay off our loans faster and own our homes earlier? Let’s reveal the secret...
Until recently, there were only term loans, and if you were committed to a 30-year loan, you’ll take exactly 30 years to pay it off.
By that time, your house would have probably doubled in value (as would your age).
You would be proud that you made a wise investment decision 30 years ago, but upon further analysis, you would realise that you have paid as much interest, if not more, than your original loan amount.
In short, the value of your house must appreciate that much to make up for all those interest charges.
So, don’t go popping the champagne just yet, unless you bought your property for RM50,000 at that time, and it is worth half a million today.
The trick to a debt-free life is to pay off your loans as soon as possible to save on interest charges.
Nowadays, banks offer various loan packages with various features and flexibilities.
You should carefully pick one which suits your requirement and pay close attention to other terms and conditions, like penalties and so on.
A good package may be one that allows you to pay any amount at any time and at the most competitive rates, with the least restrictions.
Set a goal of a desired time-frame by which you want to fully settle your mortgage, and commit yourself to that goal.
Dump your bonus into it along with all your “angpows” or pay more than the required amount every month.
In no time at all, you can say to yourself, “I own my home.” What a great feeling that’d be!
Debt Free, Stress Free!
Source : AKPK
Related post:
Heed the warning signs
No problem$ if you plan well
Shop smart for the festivals
Resolutions to stay financially fit
Smart ways to spend your bonus
Spend smart during holidays
We looked at the burden of having too much debt and suggested some smart ways of managing them last week.
This week, we will learn how to manage loans, especially home mortgage and car loans, which probably form the bulk of our loans. Ultimately, we want to be able to live in peace and to be truly free from debt stress.Should you take a loan?
Now, most of you may think the question is absurd and may be saying to yourselves: “What, you expect me to buy my house and my car with cash?”
But before you flip the page, let’s try to understand some basic principles about taking on a loan.
First of all, we have to be aware that “the borrower is the slave of the lender". Wow, are you aware of this?
When we borrow, we are at the mercy of the lender and we would have to work very hard throughout our lives just to settle our debts. We would have to sacrifice precious time with our loved ones and forego pursuing our own hobbies because we have to put in longer hours at work.
Why? Because we have loan commitments. In essence, most of us, irrespective of our professions, are working for the banks.
Secondly, we should “never go into debt for anything that you don’t expect to appreciate in value". This is a good principle to follow the next time you intend to take a loan.
Take, for example, your car. There are so many young people who can’t wait to get behind the wheel, and not just any wheel. Their cars must be trendy, stylish and sporty.
It’s truly amazing how a fresh graduate could afford a brand new car, but wait... you don’t even need to put a down payment these days! Just vroom the car out of the showroom and pay later, goes the marketing pitch.
Do you know that the value of the car drops by 10-20 per cent the moment it leaves the showroom?
If you really “need” to get a car, buy it with cash. Otherwise, there’s always the LRT, buses or car-pooling (This can help reduce traffic jams, as well.)
Having said that, there may be times when taking a hire-purchase to finance your much needed car is warranted.
There are manufacturers who may want to clear their existing stock and offer very attractive financing schemes.
You would have to compare the cost of borrowing with what you can earn from your savings/investments.
However, hire-purchase rates are never the same as bank interest rates. A good rule of thumb would be to double-up what you’re offered as your financing charge.
So, remember this: for hire-purchase rates, what you see is not what you pay!
Do you own your home?
Now, let’s take a look at our dream home. It’s probably the single largest loan for most of us. We have to consider carefully before committing to one.
As mentioned last week, not many of us are able to buy a house outright with cash.
Instead, we apply the 90/10 formula — 90 per cent loan, with 10 per cent down payment for the purchase of our home.
Unless you’ve bought your home outright with cash, you can’t really say that you own your home. You may have a home but not own it, at least not yet.
Technically, the bank owns your home until you’ve fully settled all your loan obligations. Only then, the legal ownership of the house reverts back to you.
To purchase a house, it’s seldom feasible to buy it outright with cash and it’s quite all right to take a loan.
This is because a house will, in most cases, appreciate in value over time and is generally a good hedge against inflation.
However, you would have to ensure that your monthly instalments are not too burdensome to the point that it affects more important areas of your life.
It would be meaningless to be living in your dream home but having to constantly worry about how you’re going to make the next monthly instalment.
Remember, our ultimate goal is to be able to live in peace and be free from debt-stress.
The sooner the better...
The sooner we are able to pay off our mortgage, the faster we will be able to live in peace and be free from debt-stress.
In the process, we will be able to save thousands of ringgit in interest charges (which you can use to buy your car!)
So, how can we pay off our loans faster and own our homes earlier? Let’s reveal the secret...
Until recently, there were only term loans, and if you were committed to a 30-year loan, you’ll take exactly 30 years to pay it off.
By that time, your house would have probably doubled in value (as would your age).
You would be proud that you made a wise investment decision 30 years ago, but upon further analysis, you would realise that you have paid as much interest, if not more, than your original loan amount.
In short, the value of your house must appreciate that much to make up for all those interest charges.
So, don’t go popping the champagne just yet, unless you bought your property for RM50,000 at that time, and it is worth half a million today.
The trick to a debt-free life is to pay off your loans as soon as possible to save on interest charges.
Nowadays, banks offer various loan packages with various features and flexibilities.
You should carefully pick one which suits your requirement and pay close attention to other terms and conditions, like penalties and so on.
A good package may be one that allows you to pay any amount at any time and at the most competitive rates, with the least restrictions.
Set a goal of a desired time-frame by which you want to fully settle your mortgage, and commit yourself to that goal.
Dump your bonus into it along with all your “angpows” or pay more than the required amount every month.
In no time at all, you can say to yourself, “I own my home.” What a great feeling that’d be!
Debt Free, Stress Free!
Source : AKPK
Related post:
Heed the warning signs
No problem$ if you plan well
Shop smart for the festivals
Resolutions to stay financially fit
Smart ways to spend your bonus
Spend smart during holidays
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