Why bother paying my loans earlier??

I'm writing this as a continuation of my earlier blog.

Some of my friends has asks me, what would be the reason(s) we wanna pay off our loans earlier?


well...it's basically we want to be 'ahead' on the interest. Before writing further, it is important to know the basic concept of a housing loan,... the banks will charge you for the loan by the way of interest. This way, the bank earns the profit from your loan.....and you are basically using the bank's money to build up your wealth...

For example, for a RM90k loan, the total amount that you have to pay back to the bank would be RM165,600 (assuming RM460 per month with 4.55%, -1.95% BLR), Hence, it is safe to say that the interest portion on the total amount is about RM75,600. Am i right? In short, the bank makes RM75,600 from loaning the money to you.

In addition, for the first few years of repayment, we are basically paying off the interest amount of the loan. Hence, the banks are getting back their money earlier than the rest of us! Feckers!!!

Hope now you get the idea!!

So for every payment that we make in paying the loans, we are paying for two things. The interest and the principal amount. Like I mentioned earlier, for the first few years of repayment, we are basically paying a significant portion of the monthly interest and a minimal amount of principal. The secret here is once the interest portion of the monthly payment is covered, any extra payment will be able to reduce the principal portion of the loan for that month.

So, if we decided to pay more and as frequent as possible, the interest portion will reduce the principal portion for that month...And because of this, the balance of the loan at the end of the month is lower, the interest charge for the next month will be reduced as well!!

For example, let's assume John Doe took up a RM150k loan from FatJoe's Bank. The bank interest rate is 6%. John took the loan for 30 years. How much we be the monthly payment that John has to pay? Huh!!...macam soalan matematik plak...

Hahaha, basically, John has to pay a monthly payment of RM899.33 for the next 360 months!! That comes up to about RM323,758.80 in total for the RM150k loan!! Pheww!!..That's a lot of money. And the best thing is that, John has to pay RM173,758.80 worth of interest charges!!!
That's a lot money my friends!! Banks are the No 1 ah longs!!!

Period Interest Paid Principal Paid Remaining Balance 1 RM 750.00 RM 149.33 RM 149 850.67 2 RM 749.25 RM 150.07 RM 149 700.60 3 RM 748.50 RM 150.82 RM 149 549.78 4 RM 747.75 RM 151.58 RM 149 398.20 5 RM 746.99 RM 152.33 RM 149 245.87 6 RM 746.23 RM 153.10 RM 149 092.77 7 RM 745.46 RM 153.86 RM 148 938.91 8 RM 744.69 RM 154.63 RM 148 784.28 9 RM 743.92 RM 155.40 RM 148 628.87 10 RM 743.14 RM 156.18 RM 148 472.69 11 RM 742.36 RM 156.96 RM 148 315.73 12 RM 741.58 RM 157.75 RM 148 157.98

OK, based on the table above, the interest portion that John has pay in month is RM750. How much he has to pay monthly? RM899.33 right? That's like 83% of the monthly payment goes to pay the interest!! The balance of 17% goes to the principal amount, which is a very small amount!!

Imagine, for the whole year, John has to pay about RM8,949.87 just for the interest and the balance about RM1842.01 for the principal amount! Tak luak pun kan? How ironic that you have paid about RM10,800 and the loan balance is RM148,157.98!!!

Hence, the idea here is always stay ahead of the interest!! You may be able to save a few thousand of ringgits as well!!!