Loans are becoming a necessity to move forward financially in today’s economy. Taking on loans is not necessarily a bad financial move if you excel in managing them.
However, if your phone is ringing off the hook and your postbox is filled to the brim with bills asking you to pay up – then it’s definitely time to relook at your loans, and strategise on how to pay them off.
Most people would likely turn to debt consolidation plans. However, most of these consolidation plans come with a structured and rigid payment plan. If you are unable to commit to the payment plan, you will be brought back to square one.
For example, if you consolidate your debts or loans using a personal loan, here’s how your payment structure would be like:
Loans/Credit facilities
Consolidation using personal loan
Credit card A: RM12,000
Credit card B: RM14,000
Personal loan: RM30,000
Total debts: RM56,000 Loan amount: RM56,000
Interest rate: 7.90% per annum
Loan tenure: 5 years
Monthly repayment: RM 1,302
Most conventional debt consolidation plans require you to pay a fixed amount every month for a set period. In this example, you will have to consistently pay RM 1,302 every month for five years.
This may be able to help save some interest compared to not consolidating your loans. However, it may not work for everyone, and seeing it through to the end isn’t always an easy feat.
The cost of failing to pay your monthly instalments
What happens if you are unable to adhere to the payment schedule of a conventional consolidation plan? Sometimes, life circumstances may derail our financial plan, which includes paying off our loans.
For example, an unexpected car breakdown, or a busted refrigerator at home would require additional big expenses that you may not be prepared for. These ad hoc expenses could affect your ability to service your loan, and if that happens, you could potentially miss a payment, or be late in your payment.
Both scenarios have their negative consequences. Late payment would, of course, result in interest charges or late penalty payment. Missed payment(s) on the other hand would result in your credit rating taking a hit. This means it may be harder for you to get another credit facility in the future.
With the steep living cost today, not many people are able to stick to a debt consolidation plan and in case of financial emergencies.
So, what do you actually need to do to ensure your loan repayment continues without a hitch until you are completely debt-free?
Manage your loans with a home loan overdraft
A home loan overdraft allows you to borrow money from an account that is linked to your housing loan. This takes place under a predetermined interest rate as well as repayment terms and conditions which have been set by the bank.
When you utilise the overdraft facility in a home loan, you are essentially borrowing against the equity of your property.
debt consolidation
You can find out more about home loan overdraft here.
Make your loan repayments fit your budget
The best part about an overdraft is you don’t have to stick to paying a fixed amount every month. On months that you may be tighter financially, you can reduce your repayment amount. Similarly, on months where you have a bit more disposable cash, you can choose to increase your repayment amount.
Your repayment duration will adjust accordingly when you adjust your repayment – capped at the number of years left in your mortgage.
The Alliance Bank’s Alliance One Account allows you this flexibility when you consolidate your loans using this financing solution. The amount and repayment can be adjusted based on your income and property value.
For example, if you are withdrawing RM56,000 from your overdraft facility using the Alliance Bank’s Alliance One Account at 6.88% per annum, here’s how much you need to pay:
Total overdraft amount RM56,000.00
Interest rate 6.88% p.a.
Minimum monthly repayment (RM56,000 x 6.88%)/ 12 months = RM321.00
Although you are allowed to spread your repayment over the tenure of your mortgage, you might want to speed up clearing off your loans by increasing your monthly repayment. Here’s how:
Total overdraft amount RM56,000.00
Interest rate 6.88% p.a.
Repayment duration 5 years
Monthly repayment RM1,105.70
By paying more on your monthly repayment, you are effectively reducing your repayment duration and interest charges in the long-run.
The beauty of this facility is you don’t have to stick to one or the other. You can choose to pay just RM321 on months that you need the additional cash for your expenses. However, when you are financially more stable and capable, you can increase your repayment for the overdraft.
An overdraft facility, being a revolving long-term credit facility, is not subject to any repayment as long as the amount used is within the credit limit – in this case, it is tied to your home equity. Compared to a personal loan, an overdraft is more flexible as it only charges interest on the outstanding amount, and not the withdrawn amount.
The ideal solution to manage your cash flow
Other than flexibility to the facility, there are many other reasons an overdraft facility makes sense for your loan consolidation. It is a fast and convenient option to gain access to fund(s) without having to apply for a loan. It also allows you to unlock the equity of a not-yet-fully-paid property to reduce your debts.
As cost rises, cash flow would inevitably become tighter. Instead of committing to a high loan repayment every month, you can seek for flexibility needed to pay your loans. Failing to commit to a loan consolidation plan will affect your credit rating or CCRIS report.
An overdraft facility offers you the balance of repaying your loan and the flexibility to manage your finances month to month.
However, it also requires more discipline. Without a structured payment schedule, borrowers have to ensure they are paying off their overdraft as best as they can to save on interest in the long run.
As with any financial decisions, it is best done once you have considered all the factors and costs involved. If you do have a mortgage with high equity, perhaps it is time to tap into it to give your finances a boost.
Interested to know more? Find out how much you can save when you consolidate your loans using this calculator, or read more about home loan overdraft.
Learning how to become an investor is a critical step to financial freedom. But when you’re unsure of something, it’s easier to watch from the sidelines.
For example, variations of this phrase are uttered by people everywhere every day: “I think a correction is coming, so I’m staying out of the market for now.”
But there are (at least) two things wrong with this statement…
First: Yes, there definitely is a correction coming. But there’s a good chance you’ll be wrong about when markets are going to fall (unless, like a stopped clock, you happen to be coincidentally correct). Even investing legend Jim Rogers admits he made mistakes trying to time the market. And sometimes markets give you a bloody nose with a quick 5% or 10% slip, but then find their footing again. For most investors, trying to time the market is usually an expensive effort that’s doomed to fail.
Second: You’ll lose out far more by not being at least partly invested than you will with misguided, emotion-fuelled attempts to time the market. That’s because stock market returns are extremely concentrated. Blink, and you’ll miss an entire generation of gains. That’s why “I think a correction is coming, so I’m staying out of the market for now” are words that can carry enormous opportunity cost.
So if you want to learn how to become an investor – and not a spectator – take note:
Here’s what happens when you miss the best weeks …
We looked at the weekly performance of the FTSE Bursa Malaysia Index over the past 15 years. Then we looked at how performance over that period would change if an investor was not invested during weeks when the market performed best.
Since June 2002, the FTSE Bursa Malaysia Index has had 790 trading weeks. Over that time period, it’s returned 275.3% (in U.S. dollar terms, including dividends), for an average annual return of 9.1%.
The table below shows what would have happened to that performance if an investor missed some of the best-performing weeks of the index. The single best five-day period for the index since June 2002 was the week ending October 9, 2015, when it rose 12.5%. If you had been invested for the other 789 weeks since June 2002, but missed that one specific week, your overall returns over the entire period would have fallen from 275.3% to 233.7%. Your average annual return over the 15-year period would have declined nearly a percentage point, to 8.3%.
Bursa Malaysia Index – Missing the Best Weeks (since June 2002)
Accumulated Return
Avg. Annual Return
All weeks (790 weeks)
275.3%
9.1%
Missing the best week
233.7%
8.3%
Missing the best 3 weeks
189.4%
7.3%
Missing the best 5 weeks
155.8%
6.4%
Missing the best 10 weeks
92.0%
4.4%
Missing the best 20 weeks
15.2%
1.0%
Source: Bloomberg
www.stansberrychurchouse.com
That’s just the start, though. If you had missed the best-performing three weeks of the 15-year period, your total return would have fallen by 85.9 percentage points to 189.4%. Missed the best 10 weeks? You’d have made only 92% during the period, for an average annual return of just 4.4%. And missed the best 20 weeks? You would have only made an average annual return of 1% over the 15-year period.
The magic of compounding
The key here is that by missing out on relatively few weeks of great performance, you don’t just miss out on the returns of those great weeks. Your portfolio misses out on the magic of compounding. (If you really want to learn how to become an investor make sure you read up on compounding interest).
The return you didn’t earn that super week was not available to earn you an additional return in the following weeks and years that you were investing – because you didn’t make anything in that critical week.
That’s why the total return at the end of the period, 233.7%, would be so much less than the 275.3% return you’d have made if you’d been invested during the best-performing week of the index.
What can you do?
So is the answer to stay invested all the time? No. No matter how long your time horizon, the periodic serious corrections in stock markets will – like missing out on the good weeks – destroy your performance.
But you can exercise smart risk management by watching your stop loss levels carefully. Yes, you might miss out on some of the best weeks. But by missing out on a bigger correction, you’ll have done your returns a far bigger favour.
What else can you do? You can be in the market but still have a cash cushion. As written before, cash is the best hedge. It’s cheap and it represents potential… there’s nothing worse than seeing great investment opportunities and not having the cash to invest in them. Plus, when markets drop, the purchasing power of cash rises.
So don’t pull out of the market altogether because you’re worried that there might be a correction. If you want to learn to become an investor – and not a spectator – make smart use of trailing stops… and keep some cash in the bank for rainy days.
sumber:https://www.imoney.my/articles/flexible-home-loan-overdraft
https://www.imoney.my/articles/investment-guide-investor-not-spectator
