Sunday, July 12, 2009

Daily rest, Monthly rest or Fixed rate?
Fixed or Variable rate loan? Which is better?

Fixed interest rate
Interest rate charged on the loan will remain the same through the term of the loan, no matter what market interest rates do. Means your payments being the same over the entire term. Whether a fixed-rate loan is better for you will depend on the interest rate environment when the loan is taken out and on the duration of the loan. But with Fixed rate, you have no chance to settle your loan early since its already fixed.

Variable interest rate
Interest rate charged on the outstanding balance varies as market interest rates change. Means your payments will vary as well (as long as your payments are blended with principal and interest). Benefit from this is you could settle your loan early if your keep paying more than regular installments because your interest is based on current outstanding balance.

For me, I would say Variable rate is much better since we could reduce loan period and total payment for interest.

Then in Variable interest, we have Daily rest and Monthly rest that mostly used now.
From this two, which one is better?

Daily rest
Interest will be calculated based on the previous day’s outstanding balance. The advantage for daily rest is that you have a chance to save more if you like to make lots of pre-payments on top of your regular instalments.

Monthly rest
Your loan interest for the current month will be calculated based on the previous month’s outstanding balance.

Simple calculation to compare this 2.
Let’s say,
Loan amount = $100,000
Interest rate = 6%

Amount of interest that will be charged;
Daily rest = 100,000 x 6% x 30/365 = $493.15
Monthly rest = 100,000 x 6% x 1/12 = $500.00
=> Interest for Daily rest is lower than Monthly rest…you save $6.85 for that month.

If your monthly installment is $644, for Daily rest, paid for principal(pokok) is $150.85, while with Monthly rest, you paid $144. This means, with Daily rest, you’re paying more on your principal. This is how you can settle your loan early.

Hope you guys are clear now which interest rate you should looking for when applying loan.


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