smartconsumerbanking.com

Everyone knows saving and investing are keys to build a financial powerhouse. However, as borrowing is getting so easy now (e.g. 0% interest installment plan) and the cost of borrowing is relatively low, understand how to manage your debts can be even more important than building future financial wealth.

Here are the 3 common strategies that can help make your borrowing cheaper, and get out of debt faster.

Small can kill. “Low monthly payment,” – this is lenders favorite marketing talks. Essentially, when you only paying a small monthly amount, it take a longer time to pay-off the debts, that means paying more interest to the lenders/banks. Take the example of personal loan, it usually imposed a minimum lock-in period and penalty on early settlement to prevent and discourage you to pay-off the debt faster.

Therefore, when you sign up a loan, always factor the terms and conditions into your overall total cost calculation. When shopping for a loan, always assume you would have a better cash flow (more money) in the future, and with that assumption in mind, your task is to find a loan that can be settled faster without many restrictions and penalties.

For housing loan, the general rule of thumb is to pay 13th month worth of repayment than only 12 times in a year. You can do this by divide the monthly payment by 12 and than adds up that amount to your overall monthly payment. The extra amount doesn’t look much but it will save you thousands down the road.

But does the ‘extra’ cash flow a valid assumption? For a start, you can take advantage of the recently announced relaxation of the EPF account 2 withdrawal effective 2008. If you carry any credit card debt or personal loan, it is now a good time to use your EPF money to settle them. Now I know this is as good as ‘abuse’ your EPF money, but the point here is to get you debt free first before we talk about your future plan. After setting your short-term debt, you can now turn your focus by paying the additional one-twelfth into your housing loan repayment. By only withdrawing that small amount from your EPF account, you EPF account will remain protected.

Fix your house. After juggling my variable interest rate-housing loan for the last 7 years, I am now more in favor of the fix rate. This has nothing to do with what happens in the sub-prime housing loan woes in US. But rather I found variable interest rate loan difficult to manage and plan my finances, any changes of the BLR or the multi-year interest tier will course a jeer in my financial planning. And on top of that, I am always worry about the interest rate hike. In choosing housing loan, It is better just fix it and forget about it. (See an earlier article on fixes vs float rate here)

Aimed to be the tier one. Yes, we are still flooded with credit card’s 0% installment plan and low balance transfer rate, but it will save your much more trouble if you could slashed the credit card outstanding balance interest rate. As announced by the BNM, come July next year, those who pay their credit card bills on time for 12 consecutive months will be given a lower rate of 15%. To be frank, 15% is still high but it should able to absorb some interest cost should you hit with some financial emergencies. Forget about trying getting a gold or platinum card, but rather start paying your credit card bill on time now. You won’t hurt by good credit score.