F10 Demographic

[EL118]

Bro, the 2.5% is not the actual interest, u have to take out your abacus to calculate again.

Agreed. the Hire purchase interest if flat rate, not effective. normally the rule of thumb is the effective rate = 2 x flat rate. in this case, flat rate of 2.5% = close to 5% effective rate.

That means if you place in FD 3% and take HP at 2.5%, ur interest income can never cover your interest expenses. the difference is actuall the bank's gross margin profit. i.e. they collect deposits at FD or lower rate and lend out at HP or term loan rate to make profit.

 

[EL118]

i used to wonder why HP effective rate is sometimes lower than housing mortgate effective rate. now i think it is because

i) for housing, it is based on daily or monthly rest. that means if you sell off your property (after the initial lock in period), u can pay off the balance principal amount without interest.

ii) for HP, the full interest have been included for the whole tenure. u you sell you car before the expiry of the full tenure, very minimal interest will be refunded. i.e. they make money for close to full term even though u settle early.

 

[RH5]

I need to open my textbook to find what the fish is effective interest rate, i remember that i used to hate that word during exams days... ha ha

Maybe bro DJH can give some professional advice on that... is it better to buy a car by cash or by those hedging thingy in real life..?

 

[manjohari]

here's my calculation for 7 years loan and fd for 7 years
take for example loan of 300k based on 2.5% (yes, this the real rate but not from bmw credit though)
loan rate yearly 7 years monthly payment
300,000 2.50% 7,500 52,500 4,196 for total of 352,500 (can be lower if you do early settlement)
300,000 3.50% 10,500 73,500
diff 1.00% 3,000 21,000

yes, you still have to pay monthly, of course u need to spend on this, but it's make more sense rather than paying high downpayment which u can use to get money.
if you put the FD for 1 year only, then definitely it wont work.

well, i may not work on everybody condition, i think so. if you can put FD for 300k, there is no issue to do monthly payment of 4k.

Bro, the 2.5% is not the actual interest, u have to take out your abacus to calculate again.

 

[RH5]

here's my calculation for 7 years loan and fd for 7 years
take for example loan of 300k based on 2.5% (yes, this the real rate but not from bmw credit though)
loan rate yearly 7 years monthly payment
300,000 2.50% 7,500 52,500 4,196 for total of 352,500 (can be lower if you do early settlement)
300,000 3.50% 10,500 73,500
diff 1.00% 3,000 21,000

yes, you still have to pay monthly, of course u need to spend on this, but it's make more sense rather than paying high downpayment which u can use to get money.
if you put the FD for 1 year only, then definitely it wont work.

well, i may not work on everybody condition, i think so. if you can put FD for 300k, there is no issue to do monthly payment of 4k.

IMHO, I think it is better to go for higher return investment such as property investment if the RM300k in FD cannot be withdrawn for 7 years..? You will get a lot more than the forecasted RM 21k return.

In contrast, the return would not be the RM21k if the FD is reduced each year.

 

[manjohari]

Hi RH5,

yes i agree with u

but if u pay all cash upfront, they u go your 300k.
at least if you put it on FD and can enjoy better service with priority/preferred banking, not much on investment.
my idea is, why pay cash when u can make a good used of it, not in term of return, but more towards getting better service from banks where u can enjoy lower hire puchase rate, higher fd rate (short/long term), better BLR, insurance, etc...

IMHO, I think it is better to go for higher return investment such as property investment if the RM300k in FD cannot be withdrawn for 7 years..? You will get a lot more than the forecasted RM 21k return.

In contrast, the return would not be the RM21k if the FD is reduced each year.

 

[RH5]

perhaps.. I would not go for property investment at this moment though... It is overpriced and I have this bad feeling that the market will eventually crash because of the deepened European and US economic crisis..

 

[EL118]

here's my calculation for 7 years loan and fd for 7 years
take for example loan of 300k based on 2.5% (yes, this the real rate but not from bmw credit though)
loan rate yearly 7 years monthly payment
300,000 2.50% 7,500 52,500 4,196 for total of 352,500 (can be lower if you do early settlement)
300,000 3.50% 10,500 73,500
diff 1.00% 3,000 21,000

yes, you still have to pay monthly, of course u need to spend on this, but it's make more sense rather than paying high downpayment which u can use to get money.
if you put the FD for 1 year only, then definitely it wont work.

well, i may not work on everybody condition, i think so. if you can put FD for 300k, there is no issue to do monthly payment of 4k.

Hi bro, there is flaw in your calculations to come to the "profit" of 21k. u have missed out the important "mthly instalment payment" that keep reducing your loan amount, which is why the effective interest rate will almost double that of the "flat" rate.

This concept is important and is where the bank make the profit. many banks or credit card also use this technique to "mislead" card user for "cheap" personal loan of 7% flat which in effect is almost close to 14% effective. (next time anybody receive phone calls from banks offering low interest loan, just ask them how much is the effective interest rate before deciding)

the housing mortgage loan interest will be the "effective interest". if you can get BLR - 2% (BLR @ 6.6), then the effective interest rate is 6.6-2 = 4.6%. because it is based on daily rest. i.e the interest is calculated based on reducing principal amount (after monthly instalment payment) instead of original loan amount throughout the tenure like the HP.

These may sound like intimidating, but once u understand them is very effective in your financial planning and "capital allocation" decision between keeping FD, property investment or share investment etc.

 

[RH5]

Hi bro, there is flaw in your calculations to come to the "profit" of 21k. u have missed out the important "mthly instalment payment" that keep reducing your loan amount, which is why the effective interest rate will almost double that of the "flat" rate.

This concept is important and is where the bank make the profit. many banks or credit card also use this technique to "mislead" card user for "cheap" personal loan of 7% flat which in effect is almost close to 14% effective. (next time anybody receive phone calls from banks offering low interest loan, just ask them how much is the effective interest rate before deciding)

the housing mortgage loan interest will be the "effective interest". if you can get BLR - 2% (BLR @ 6.6), then the effective interest rate is 6.6-2 = 4.6%. because it is based on daily rest. i.e the interest is calculated based on reducing principal amount (after monthly instalment payment) instead of original loan amount throughout the tenure like the HP.

These may sound like intimidating, but once u understand them is very effective in your financial planning and "capital allocation" decision between keeping FD, property investment or share investment etc.

so what do u reckon? preferable to buy car in cash if we could?

 

[EL118]

so what do u reckon? preferable to buy car in cash if we could?

this question is relative. it is very much depends on how well u can generate return on your available capital / cash. scenarios as follows

i) if Mr A's best investment is in FD which yields 3% per annum. and effective car loan is at 5% (flat at 2.5%), it is better to buy using cash. (ceteris paribus - assuming all other things being equal)

ii) if Mr A can consistently or on average generate return of 10% compound return from his share investment or property investment, it is better to channel his cash to investment instead of buy car using his cash. (again ceteris paribus)

The above are simple comparison examples but it shows the basic importance of capital allocation (which makes Warren Buffet one of the richest man in the world)

 

[RH5]

this question is relative. it is very much depends on how well u can generate return on your available capital / cash. scenarios as follows

i) if Mr A's best investment is in FD which yields 3% per annum. and effective car loan is at 5% (flat at 2.5%), it is better to buy using cash. (ceteris paribus - assuming all other things being equal)

ii) if Mr A can consistently or on average generate return of 10% compound return from his share investment or property investment, it is better to channel his cash to investment instead of buy car using his cash. (again ceteris paribus)

The above are simple comparison examples but it shows the basic importance of capital allocation (which makes Warren Buffet one of the richest man in the world)

Thanks for sharing..! Thats what i thought..! :top:

 

[manjohari]

Bro EL118, tepat sekali

i should rephrase my statement to "u get more benefits" rather than profit (misleading).

i think i was having option ii) in my mind. (lately jerebu, kurang jelas sikit hehehe)
it's a mixed of FD and other investment channels.

 

[jefngkl]

nick: Jeff
Age: 29
Occupation: analyst

car ownership histroy:
1) Mit Galant in college
2) Honda Jazz post uni
3) Mazda 3
4) Mazda 6 & F10

 

[Jeffrey]

Hi Guys, if you guys are looking for something safe and almost FD like security, there is a stock in our Bursa call Malton-LA. It's basically a Loan stock with a tenure of 7 years almost like our full car loan period. It will give you 9% yield yearly and more if you reinvest the interest and the share redemption of the LA, you'll hit 12% throughout it's 7 years life span.

 

[DJH]

Guys, I am no expert but I can only add that many of us are greedy enough to be influenced into buying spree the minute we heard good things about property, gold, FD, and etc. I even have one friend putting all his money into buying gold bars. Sadly, his house got robbed so he is back to square one. I would suggest you think about 2 things. One to set side for investment another for self pleasure (mine would be F10 and 320d, lol).
Another is purely investment. Look into variety of risk factors be it long, mid or short. I apportioned it into properties, FD, investment fund (insurance, yes u get to be insured and still has a high return of double digit growth y-o-y. There are few products for mid and long term), insurance, and gold, just to name a few. We are limited by how much the bank can loan for house purchases and soon application will be based on net income as opposed to gross income limiting our power of purchase. Now it is still a good buy due to competition with BLR/BFR of 6.6% minus 2.4-2.5 on daily interest. Soon, the banks may reach a point where they decided to team up and set a market standard rate. It's already happening in telco where collectively 6% tax will be borne by consumer come 15 sept. Hence, we need to diversify our investments. I for one dun play stock markets as it is a high risk venture so I am more for mid and long term.

 

[DJH]

To add on the car loan. We should not loan it more than 5 years. Best is between 3-5. Normally for every car, if it is 5 years loan, by the third year we are already paying for principal amount. If we decided to sell it in third year, we will still get some amount back. So, that means, u can change the car by the 3rd year without fearing of getting into red to pay off you existing car loan. I will not buy car wit cash as i would rather pump it into properties which by far more beneficial

 

[macdaque]

Guys, I am no expert but I can only add that many of us are greedy enough to be influenced into buying spree the minute we heard good things about property, gold, FD, and etc. I even have one friend putting all his money into buying gold bars. Sadly, his house got robbed so he is back to square one. I would suggest you think about 2 things. One to set side for investment another for self pleasure (mine would be F10 and 320d, lol).
Another is purely investment. Look into variety of risk factors be it long, mid or short. I apportioned it into properties, FD, investment fund (insurance, yes u get to be insured and still has a high return of double digit growth y-o-y. There are few products for mid and long term), insurance, and gold, just to name a few. We are limited by how much the bank can loan for house purchases and soon application will be based on net income as opposed to gross income limiting our power of purchase. Now it is still a good buy due to competition with BLR/BFR of 6.6% minus 2.4-2.5 on daily interest. Soon, the banks may reach a point where they decided to team up and set a market standard rate. It's already happening in telco where collectively 6% tax will be borne by consumer come 15 sept. Hence, we need to diversify our investments. I for one dun play stock markets as it is a high risk venture so I am more for mid and long term.

It's funny DJH that we are thinking along very similar if not identical lines. I too hv a petrol F10 and a 320D (for now until my wifey changes to another car). Like yourself, I have a passion for property, and much lesser love for equity. Amazing!

 

[DJH]

:shock: So u r my long lost twin bro? Dun tell me, u r as old as me too, lol

 

[macdaque]

:shock: So u r my long lost twin bro? Dun tell me, u r as old as me too, lol

Haha, I am still young at heart. For gems that you have gathered in experience as I can see from your post, I am confident that you have done your years in the sweat shop. We have much to share - maybe we should meet up some day. From what I read, you may have many students - I have too, and I mentor willingly as I was willingly mentored in my earlier years. Unfortunately, the younger ones have different priorities choosing present satisfaction rather than postponing gratification, and have much arrogance about their priorities. I have seen the downfall of many arrogant ones, yours truly a living testimony of a survivor. I have an uphill task mentoring a few presently. Like yourself, I am a true believer of the magic of compounding interest - the skills of calculating present value vs. compounding interest (both earned and paid to the bank) in a relative and comparative manner is key to sound investment.