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 Is it wise to paid off car loan?

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victorian
post Mar 5 2021, 10:32 AM

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QUOTE(Hiha90 @ Mar 5 2021, 10:27 AM)
No point. Car interest is low. max also 3.5%. rather use the money for investment or keep the money in EPF for Dividend.
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Deyh if you are not sure please read the thread first la.

Car loan is 3.x % FIXED interest, not effective interest (like most investment outside like FD EPF or mortgage loan).

A 3.5% car loan is actually higher than 5% EPF dividend.

Are you sure your car loan interest is lower than EPF?
kidmad
post Mar 5 2021, 10:33 AM

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QUOTE(kidmad @ Mar 5 2021, 10:15 AM)
dude ur info isn't right.

Loan Amount + Cost of Interest - Previous Instalments Paid - rebate of interest for remaining years (not in full).
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ah now i need to be corrected. with the rule of 78 the calculation of total interest cost paid is pretty accurate.. i put them in a spreadsheet and start tabulating the figures. The so called rebate which one enjoyed is actually just the interest cost he/she have not paid so far.

QUOTE(victorian @ Mar 5 2021, 10:24 AM)
Easy, mortgage loan.

Considering that a mortgage loan is now 3% but car loan is still fixed at 5-6% EIR, it sucks.

But yeah other than that it's considerably lower than personal loan and credit card
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well.. did housing loan went down that low? haha i'm not aware i only knew my housing loans had some adjustment but was it down to 3%?

well your right. after converting the calculation to EIR it seems like mortgage loan do have lower interest but still it has to be balance. Cause i've done 3 times of early settlement for my car.. and it's always because i'm gonna buy another property. I had to free up the allocated credit to ensure my mortgage loan won't be rejected. For cases of > 3 properties.
j.passing.by
post Mar 5 2021, 10:53 AM

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QUOTE(kidmad @ Mar 5 2021, 10:33 AM)
ah now i need to be corrected. with the rule of 78 the calculation of total interest cost paid is pretty accurate.. i put them in a spreadsheet and start tabulating the figures.

The so called rebate which one enjoyed is actually just the interest cost he/she have not paid so far.

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The so called rebate is non existent. It's a imaginary rebate or discount you think you have in early settlement.

Please edit your previous post... it only adds clutter to make it more confusing to others.


Hiha90
post Mar 5 2021, 12:28 PM

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QUOTE(victorian @ Mar 5 2021, 11:32 AM)
Deyh if you are not sure please read the thread first la.

Car loan is 3.x % FIXED interest, not effective interest (like most investment outside like FD EPF or mortgage loan).

A 3.5% car loan is actually higher than 5% EPF dividend.

Are you sure your car loan interest is lower than EPF?
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If ur EPF balance at 100k, and car loan at 20k. don't u think its wiser to keep it in EPF? Just my view. Correct me if i'm wrong.

victorian
post Mar 5 2021, 12:38 PM

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QUOTE(Hiha90 @ Mar 5 2021, 12:28 PM)
If ur EPF balance at 100k, and car loan at 20k. don't u think its wiser to keep it in EPF? Just my view. Correct me if i'm wrong.
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No right or wrong. EPF is about the same with car loan interest. But some people value peace of mind of being debt free.
nugget_piece
post Mar 6 2021, 09:38 AM

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let say for example,

if I have 25k spare (after allocation for savings and investments) which I intend to use for loan settlements.

a) I can make full settlement for the remainder of my car loan at 3.15% simple interest rate. currently 1.5years into the loan.

b) Make partial settlement of mortgage loan.

which do you all think is a better choice? (a) or (b)?


MUM
post Mar 6 2021, 09:49 AM

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QUOTE(nugget_piece @ Mar 6 2021, 09:38 AM)
let say for example,

if I have 25k spare (after allocation for savings and investments) which I intend to use for loan settlements.

a) I can make full settlement for the remainder of my car loan at 3.15% simple interest rate. currently 1.5years into the loan.

b) Make partial settlement of mortgage loan.

which do you all think is a better choice? (a) or (b)?
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hmm.gif depends,...just some of these consideration
do you want a peace of mind of having "debt" free?
do you need to reduce your debt service ratio with intention of getting a loan in the next few months?

how much can you "get rebate" for this early settlement of 25k?
how much returns can you get if you invest this 25k?

This post has been edited by MUM: Mar 6 2021, 09:51 AM
DomSted74
post Mar 6 2021, 10:51 AM

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Car loan interest is already included into your payment amount, regardless of when you pay it off.
Unless the bank gives you discount, the bank already earn ur future interest
xuzen
post Mar 6 2021, 10:57 AM

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QUOTE(Cicak980 @ Mar 3 2021, 08:08 AM)
Good morning

I have a 7 years car loan which amount to 17k. Have service the loan 2.5 years .

Now i have the mean to settle. Either through i sinar or saving.

Does it make financial sense to settle? Or should i channel the fund to investment?
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Motor Vehicle Hire-Purchase early settlement? NO. Why? Coz' the interest is calculated whether you pay early or follow schedule. There is not incentive to pay early.

This is in contrast with property loan where it is reducing loan. You pay early you save on interest.

I won't go into the mathematics of it, but the above is the gist of it.

Xu'
j.passing.by
post Mar 6 2021, 05:23 PM

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QUOTE(Takudan @ Mar 4 2021, 02:27 AM)
Hi there,

it's my first time hearing rule 78 but on top of this, my first time hearing such a guideline i.e. do not take HP loan more than 5 years....

Now... back to the argument about stretching out your loan and getting lowest possible interest rate. I don't see that much difference between 5/7/9y loans, because either way you're paying interests mostly on the early years... what else do you have to say about this?

Appreciate your insight, thank you!
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1st, you need to understand that the flat rate must be converted to effective rate to make any meaningful comparison.

And it will show that a flat rate, say 2.5%, vary very slightly in effective rates whether the tenure is 5, 7 or 9 years.

The lump sum to pay on early settlement is:
(Loan Amount less Instalments Paid) + Cost of Interest.

Let's take a step back and consider what if we pay the monthly instalments till the end of the loan tenure (i.e. no early settlement).

We will paying: All the monthly instalments. And we know that the total amount to pay back is the loan amount plus the total cost of interest.

The total cost of Interest is equal to the effective interest rate. So, if the tenure is 5, 7 or 9 years, the cost of interest we paid is about the same (i.e almost same effective rate).

The only difference from 5 to 9 years is 4 more years of paying more interest for using the loan 4 more years.

So, the question you need to ask yourself is: Why take a longer loan than necessary, say taking a 9 years loan rather than 5 years when you could easily cover the monthly instalments in a 5 years loan?

======

Now back to early settlement...

The lump sum to pay on early settlement is:
(Loan Amount less Instalments Paid) + Cost of Interest.

What is the cost of interest? It is not the effective rate. The effective rate is only good if we pay instalments till the end of the loan tenure.

In early settlement, the cost of interest on using the loan for x number of months will have to be calculated.

And it is calculated using the formula in "rule of 78".

Using this formula, you can work out the cost of interest in early settlements.

Say, early settlement in year 4 in a 5, 7 or 9 years loan.

Work out the cost of interest for each and compare them first... before deciding to purposely stretching the loan further, especially when we already have in mind to trade in the car and upgrade to another one in 4-5 years time.

Lastly, also take note of the 1st part of the equation:
(Loan Amount less Instalments Paid)

In early settlement, you still need to pay the remaining balance in the loan amount. You may pay lower monthly instalments in longer loans, you still need to cough out the remaining balance.

This post has been edited by j.passing.by: Mar 6 2021, 05:30 PM
nugget_piece
post Mar 7 2021, 12:59 PM

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QUOTE(MUM @ Mar 6 2021, 09:49 AM)
hmm.gif depends,...just some of these consideration
do you want a peace of mind of having "debt" free?
do you need to reduce your debt service ratio with intention of getting a loan in the next few months?

how much can you "get rebate" for this early settlement of 25k?
how much returns can you get if you invest this 25k?
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thanks, i will think it through.

yes, debt free is nice. but mortgage loan seem large.
settling them will take quite some time.

no intention for a loan anytime soon. current dsr is okay.

i need to call bank for the rebate amount.
likely not going to invest this 25k as it was allocated for settling loan purposes.




lcyeap90
post Mar 7 2021, 02:47 PM

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Recently asked myself the same question and went to bank to ask for details.
i think might shed some light for some people

I bought my car in Nov 2014, 9 years loan, Loan amount RM75,400, interest rate 2.59%, total interest RM17,575.74, total paid off amount when maturity RM92,975.74

Went to ask bank for fully settlement in end Feb 2021, Loan balance Circa RM29,400, Fully settlement Circa RM27,710.

The interest rebate is roughly RM1,700 for around 3 years of early settlement.

You may do the math smile.gif


victorian
post Mar 7 2021, 03:20 PM

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QUOTE(lcyeap90 @ Mar 7 2021, 02:47 PM)
Recently asked myself the same question and went to bank to ask for details.
i think might shed some light for some people

I bought my car in Nov 2014, 9 years loan, Loan amount RM75,400, interest rate 2.59%, total interest RM17,575.74, total paid off amount when maturity RM92,975.74

Went to ask bank for fully settlement in end Feb 2021, Loan balance Circa RM29,400, Fully settlement Circa RM27,710.

The interest rebate is roughly RM1,700 for around 3 years of early settlement.

You may do the math  smile.gif
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Total interest 17,575 spread over 9 years, 2 years 8 months left of tenure do early settlement you only get 1,700 ( that's less than 10% interest for settling 2 years plus earlier).

If there's no rule 78 you should get back RM5.2k

SUSxander83
post Mar 7 2021, 09:21 PM

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QUOTE(lcyeap90 @ Mar 7 2021, 02:47 PM)
Recently asked myself the same question and went to bank to ask for details.
i think might shed some light for some people

I bought my car in Nov 2014, 9 years loan, Loan amount RM75,400, interest rate 2.59%, total interest RM17,575.74, total paid off amount when maturity RM92,975.74

Went to ask bank for fully settlement in end Feb 2021, Loan balance Circa RM29,400, Fully settlement Circa RM27,710.

The interest rebate is roughly RM1,700 for around 3 years of early settlement.

You may do the math  smile.gif
*
This is because it with rule 78 on reducing interest method

A lot of ppl don’t understand when you take a loan it’s already add on interest which you’re paying or pare down interest in the 20 to 36 months depending on tenure

For housing it’s another method of interest calculation on progressive interest hence which is why base rate is with added on interest depending tenure and conditions
TSCicak980 P
post Mar 9 2021, 10:24 AM

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Update for post.

I went to bank to ask about full settlement.

H/ P loan remain RM 17140

Serve period 34 installment.

Loan period = 7years + 6 months monotorium (90 installment)

Amount settle Rm 15800

Interest save rm 1340

In conclusion, due to rule 78 , it is not wise finacially to settle early. If you intent to settle early, do it on the second year of loan repayment . And always take 5 years loan as it spread more evenly.

Thank you everyone for insight.



victorian
post Mar 9 2021, 10:52 AM

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QUOTE(Cicak980 @ Mar 9 2021, 10:24 AM)
Update for post.

I went to bank to ask about full settlement.

H/ P loan remain RM 17140

Serve period 34 installment.

Loan period = 7years + 6 months monotorium (90 installment)

Amount settle Rm 15800

Interest save  rm 1340

In conclusion, due to rule 78 , it is not wise finacially to settle early. If you intent to settle early, do it on the second year of loan repayment . And always take 5 years loan as it spread more evenly.

Thank you everyone for insight.
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Better one will be:

1. Never settle early, unless you want to be debt free or free up DSR. The moment you sign the paper, you are already locked in and interest is already incurred.

2. Does not matter 5 years or 9 years, as long as you are firm with your decision to continue repayment over the tenure.


DenshaOtoko
post Mar 18 2021, 06:57 AM

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QUOTE(Cicak980 @ Mar 3 2021, 08:08 AM)
Good morning

I have a 7 years car loan which amount to 17k. Have service the loan 2.5 years .

Now i have the mean to settle. Either through i sinar or saving.

Does it make financial sense to settle? Or should i channel the fund to investment?
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Just paid it off and keep the car as long as it can run.

Most wealthy people I've seen paid cash for the vehicles.

It's nice to be weird sometimes bcoz normal people broke😄

This post has been edited by DenshaOtoko: Mar 18 2021, 07:02 AM
ObeLIsK
post Mar 18 2021, 10:13 AM

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This is very insightful, glad I come across this while doing my research on getting a car.

Since rule 78 basically screw consumers like us, what would be best practice to get a new local car (Myvi) as I'd like to settle it ASAP probably within 2-3 years.

Would putting in a bigger downpayment from my savings help or would that land me unnecessary trouble with the taxmen...?
DragonReine
post Mar 18 2021, 10:19 AM

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QUOTE(ObeLIsK @ Mar 18 2021, 10:13 AM)
This is very insightful, glad I come across this while doing my research on getting a car.

Since rule 78 basically screw consumers like us, what would be best practice to get a new local car (Myvi) as I'd like to settle it ASAP probably within 2-3 years.

Would putting in a bigger downpayment from my savings help or would that land me unnecessary trouble with the taxmen...?
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downpayment helps keep loan amount low which is almost better tongue.gif the only problem you'd run into tax if you never declared to LHDN where you get that money from in the first place laugh.gif
victorian
post Mar 18 2021, 10:20 AM

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QUOTE(ObeLIsK @ Mar 18 2021, 10:13 AM)
This is very insightful, glad I come across this while doing my research on getting a car.

Since rule 78 basically screw consumers like us, what would be best practice to get a new local car (Myvi) as I'd like to settle it ASAP probably within 2-3 years.

Would putting in a bigger downpayment from my savings help or would that land me unnecessary trouble with the taxmen...?
*
If you know you will settle in 3 years, then take 3 years loan. Be careful of overgearring though, since 3 years loan means higher installment unless you put down higher downpayment

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