I think i know what are they talking about. Take loan 100k say 5 years. Put 100k into FD at 4% for 5 years. The FD principal and interest cannot be touch. Then pay off the car loan using salary.

Pls read post # 142

as I already said , 100k windfall is a one-off. I wont be withdrawing the FD principal to pay for car monthly installment.

EXACTLY ! ITS SIMPLE SCENARIO AND SIMPLE MATH. YET TOO HARD FOR MANY PEOPLE TO GRASP.

Then you are not comparing apple with apple.

If you don't need to pay off the car installment through other source of fund, the money can generate you FD interest, which you convenience forget.

The comparison is you have 100K now, which is "cheaper".
Use the 100K to pay off, or keep on 100K, get a loan, then pay off slowly using the 100k.

He forget the salary if saved (if don't need to pay off the installment), the salary money generates the 4% interest as well, which is not taking into calculation.

So the calculation is still wrong.

RM1875 increment per month x 4% compounded over the 5 years, it is a big sum of money as well, which one is losing it without noticing.
You need to add back into it, to have a correct comparison.

Might as well borrow 100k from Ah Long to put into FD. Then pay off monthly from other sources of income. Sometimes we embarrassed our own self.

A lot of people have serious conceptual problem about money :-

Pay every month 500, and after 1 years, sum it as paid only 500 x 12 = 6000.

Wrong !

After 5 years, paid only 6k x 5 = 30k.

Big terrible mistake which they don't realize.

Non finance trained people will find it very hard to grasp the concept of Time Value of Money.

let me explain:

Lets say I put RM100K in a 12 mth period FD at 5% p.a, one year later my profit is RM 5,000 and a ROI of 5%. Yay! Happy right?

Then If I withdraw it out and do nothing... in the second year the annualised return becomes (5)^(1/2) = 2.24% p.a. but the profit still remain 5%.

3 years later, the ROI is still 5% but now the annualised return is (5)^(1/3) = 1.71% p.a.

4 years later, the ROI is still 5% but now the annualised return is (5)^(1/4) = 1.5% p.a.

So you see, in real finance, we take in the concept of time and the cost of doing nothing is factored in.... hence we say Time is Money, we really mean it... mathematically!

So, if you put in FD and wait and time the market.... you will lose your annualised return (we called it Internal Rate of Return, symbol is xIRR).

Back to the question of taking a HP versus buying cash.

Usually, HP interest rate of 2.8% to 3% when converted to effective interest rate (aka Time Value of Money concept) will be around 5.0% p.a. (xIRR)

If you take the loan instead of paying cash and used the money instead to put your cash in FD @ 4% p.a. = you are a sor hai!

If you take the loan instead of paying cash and used the money instead to put into real investment and say get 10% p.a = you are a W1NN4R!

Understand?

Xuzen

This post has been edited by xuzen: Jul 27 2015, 02:52 PM

u could reinvest the yearly interest payout to get compounded returns.

This post has been edited by sootienann: Jul 27 2015, 12:34 PM

Sootienann,

I am using a non-investment as a means to illustrate the difference between ROI and xIRR. It is plainly for educational purpose nia.

Xuzen

aiyoh, why so mean to me? Did I step on your tail? Read the reply again, do you really understand the difference between a Flat rate and Effective interest? As said, the 2.5% flat rate converted to effective rate is 4.73%. That's a quick way of comparing the loan of 4.73% against the FD of 4.0%.

Show you calculator, show you the apple to apple comparison also you don't try to understand... and want to be rude!

Never mind the rudeness, let's get on with some hard numbers... (This is a open forum, hope it will helps other readers.)

100k flat rate of 2.5%, 5 years loan, installment = 1875/month
End value of 100k in a 4.0% FD, for 5 years, with compounded interest = 121,665


There are 2 events: a) put the 100k into FD and take the loan. b) take out the 100k and pay for the car.
To compare the 2 different events, we focus on a single object that will be affected by the 2 separate events.
The object to observe is the end value of the FD at the end of 5 years.

a) put the 100k into FD and take the loan (and pay the installment every month).
As we already knew, the end value of 100k in a 4.0% FD, for 5 years, with compounded interest is RM121,665

[Formula: P*(1 + r)^t ]

b) take out the 100k and pay for the car.
So we are not taking any loan. But to compare apple to apple, and to observe what is the end value of the FD, we have to put the monthly installment into the FD, every month.

End value of the FD at the end of year-5, with RM1875 at the end of every month for 60 months = RM124,310

[Formula: P[(1+i)^n - 1] / i ]

Conclusion: (B) take out the 100k and pay for the car in one shot gives higher return.

No offense to you my friend. I only hope to impart the correct knowledge so you can see the gaps in your understanding.

The illustration below is a total apple to apple comparison:

Scenario 1 - Take car loan, put RM100,000 in FD
FD Placement - RM100,000 @ 4%p.a.
Car Loan instalment - RM1,875 per month (paid from other source of funds)
Total outlay - RM100,000 + RM1,875 every month throughout tenure = RM212,500 (absolute value, not adjusted for time value of money)
Total return - One car + Rm120,000

Scenario 2 - RM100,000 used to pay for car in cash
Car Purchase - RM100,000 single bullet payment
FD Placement Instalment - RM1,875 every month @ 4%p.a. (paid from other source of funds)
Total outlay = RM100,000 + RM1,875 every month throughout tenure = RM212,500
Total return = One car + RM...

Want to take a guess what the total return is in Ringgit?

I salute everybody who take their time and patient to show mathematical calculation to educate a forummer here, despite his rudeness. You guys are

For me, I don't waste time on such people. I hope he continue to practise what he "believe" and let banks make his money

The sor hai still thinks everyone else here is a SOR HAI .he is very clever!

conclusion:

A ) buy a bmw with 1.38% interest rate
or
B) take a car loan and put your money in ASB

This post has been edited by sootienann: Jul 27 2015, 01:46 PM

Have you understood flat interest vs reducing balance interest ? If you have, then you can compare the above very easily.

Some sifu have shown you the website to convert flat interest. You want to try and show us the results ?

Forget it showtime 747, save your breathe.

this sootienann is one arrogant yet stupid person who never wanna admit he had been a sorhai , taking a car loan at 2.8% to keep that money in FD at 4.0% thinking he can earn RM7500 from bank.(his calcul: RM120k-112.5k)

Now after so many pointers here, he has slowly learned that indeed he had been a sor hai.

still you can see he refused to admit he had been a sor hai, now he is pushing the car loan interest down to 1.38% and push the FD rate up to 8.5% by using ASB, hoping that he would be proven right this time.

Well done sor hai sootienann!
Be man to admit your mistake,...dont go putar belit moving goal post when you cant score.




This post has been edited by guy3288: Jul 27 2015, 02:25 PM

Congrat to you.
You finally learned....albeit the hard way.

If he finally understood the flat rate interest, then he will realise he was a sor hai previously. And he will not be a sor hai from now on.

And learn to be more humble for things he don't understand 100%

But if he still don't understand, then he will continue to be a sor hai lor.....

This post has been edited by Showtime747: Jul 27 2015, 02:31 PM