Because bank uses rule of 78, we pay a large portion of the interest during the early loan cycle.

Total FD interest received (assume is 4%) will be more than the total interest paid (3%) but it will only realized towards the end of the loan cycle because of the above.

Example: 3% FD vs 3% Car Loan


This post has been edited by rapple: Jun 20 2018, 11:12 AM

The yearly effective interest rate based on 3% FD and 3% car loan interest.

*To break even the finance cost for a 7 year loan, one will need at least 6.5 years of time in FD placement.




This post has been edited by rapple: Jun 20 2018, 02:00 PM

The point is effective interest rate will go lower every year and not just 5.57% as you mention earlier.

I used 3% on both FD interest and car loan interest to prevent people asking "what if FD rate doesn't give 4% anymore".

Whether is 10k or 50k as principal, the compounding interest shows a positive net return over the 7 years loan.

*To break even the finance cost for a 7 year loan, one will need at least 6.5 years of time in FD placement.

Which is wrong?

The calculation I did in my previous post, shows exactly how much interest is paid to the bank yearly.

If you wanna believe bank take interest evenly every year then be my guest.

I have done early settlement before so I’m sure it’s quite accurate.

Cheers.

The table shows how much interest we paid to the bank yearly.

We are paying more interest to them in the early cycle of the loan and pay lesser in the later stage. That's why if one, want to do an early settlement of the HP loan will be surprise to see there's still so much principal owing to the bank despite already paying half the loan tenure.

You are only able to earn money only if the FD is place there for the same tenure as the HP loan without uplifting it.

Simply said, the bank earn your money NOW while you have to wait 7 years later to earns yours.

This post has been edited by rapple: Jun 22 2018, 04:38 PM

Because they don’t like paying interest to the banks.

If one is so piss off by bank earning your money, then don’t put money in the banks. They are using your money to loan to us to generate more income.

Be like Najib, keep in the house.

Scenario 1 ~ Without factoring his active income and taking the 5 year loan, the FD draw down to pay the monthly loan it's not going to be enough and it will be in negative of RM5,362.

Scenario 2 ~ Without factoring his active income again by paying cash 100k. You have a fully paid car but no FD interest received because you are assume to have no active income and to make this a fair comparison.

And how many of you would buy a car without an active income.

The actual interest paid to the bank for that year will be my effective rate and this is the only thing I need to know. By knowing this, I could finalized my client accounts and subsequently ask them to pay my fees to cover my cost of interest.

Cheers.