Would you be able to help me? I am in debt now, because I lost RM 300,000 in an investment scheme.

Recently a student by the name of Ezri (not his real name) wanted to sign up for our Debt Management Workshop (DMW), he asks:

“Would you be able to help me? I am in debt now because I lost RM 300,000 in an investment scheme, my friend cheated me.”

How would you 𝗳𝗲𝗲𝗹 when you are in this situation?

Would you go out and get help? 

or would you continue to hide in your corner, afraid to face this reality and fight to stand back on your 2 own feet?

I invited Ezri to our 4-hour Debt Management Workshop (DMW). He was very positive and participated 100% in every activity. To me, he didn’t seem like someone going through distress. He didn’t seem like someone who is bothered by debt.

Perhaps he is different.

At the end of the course, he asked me, what should he do in his current situation. Should he take up an offer by one of the bankers to do a debt consolidation on his debts? He sent me all the attachments, calculated by the banker.

How does his situation look like?

As much as I wanted to answer his question, I insisted that he come to the 1 to 1 private consultation and prepare using what he learnt from the DMW workshop. I affirmed to him that he will get his answers once he prepares his Financial Compass for our 1 to 1 session.

And so he did, he bravely came into our 1 to 1, the first Monday after the workshop ended. Lo & behold, 

• He has a deficit of RM 7,300+/mth and his total debt was RM 1.2 Mil. 
• Out of which his total loan repayment was RM 9,141/mth
• When we dug deeper, RM 5,726/mth is the main problem of the RM 151K credit card debt and personal loan

What happens after the 1 to 1 Private Consultation?

After going through many options in our 1.5 hours 1 to 1 session, we decided to do a Debt Consolidation via a 10-year Personal Loan that was able to save him RM 4,226 instalments per month. After the execution of the case, his situation improves by:

• Having a reduced repayment of RM 1,500/mth after the Debt Consolidation, saving him RM 4,226.
• We found out part of the high commitment was also due to the ASB loans which were not giving a positive return due to the falling ROI% over the years. So, we got him to settle off the loan of RM 1,950/mth.
• Continue to reduce his expenses and maximize his insurance policies coverage by reducing RM 1,135/mth to fully recover from his RM 7,300+ deficit as we also found out he was overspending to support his 2 families.

How did we do to solve his situation?

There were many strategies involved to solve Ezri’s situation. Typically we would use his property as a way to consolidate his debts. Unfortunately, Ezri’s properties did not appreciate much as he bought them recently. (To find out more on how we do debt consolidation using property & save RM 10,000 a month, click HERE)

So another strategy we use is to see if it is possible to consolidate it into a Personal Loan. (Here is another case study using Debt Consolidation using Personal Loan in 2012) Did you know the difference between Fixed Line loans vs Reducing Balance loans? The reason I am asking is – Do you know that there are Personal Loans that are using Reducing Balance calculation?

Why use a Reducing Balance loan? In the long run, Reducing Balance loans typically incur lesser interest on your overall loan. But of course, you still need to verify & do your due diligence instead of assuming every Reducing Balance loan is ‘cheaper’.

Fixed Line Loan vs Reducing Balance Loan

How does a Fixed Line loan behave? Let’s take this as an example

• Loan Amount = RM 450,000
• Interest = 6.5%
• Duration = 30 years

So for a Fixed Line loan total interest calculation will be

=> RM 450,000 x 6.5% x 30 = RM 29,250

=> RM 29,250 x 30 = RM 877,500

So, as you can see, Fixed Line loans are very straightforward. The interest calculation is calculated as a straight line. You calculate the interest being charged for 1 year (RM 29,250) and then you multiply it by the total duration of it for 30 years (RM 877,500). So can you guess what are the loans that use this type of calculation?

Will share with you the ANSWERs at the BOTTOM of this post. Do check it out.

For the Reducing Balance loan, the behaviour is slightly different. Let’s take the same example above. And to illustrate it, you can refer to the diagram below. You can see that it curves down. Can you guess its behaviour? YES, you are right, the more you pay down the loan, the lesser interest you pay.

The interest is calculated at different intervals => it can be Daily, Monthly, Quarterly, Half-yearly or Yearly. This is where you will see in your loan agreement the TERM = DAILY REST or in my time we still have MONTHLY REST. But I did not witness my parent’s time when it was still Half Yearly / Yearly REST

The total interest using Reducing Balance will be = RM 573,952.

You can use this Financial Calculator by downloading it on your phone HERE and keying in the values below

Why is there such a BIG difference? RM 303,548!

Can you see a BIG difference? This is

Fixed Line Loan Interest vs Reducing Balance Loan Interest => RM 877,500 vs RM 573,952 ! A whopping difference of RM 303,548 over 30 years period.

Can you imagine the amount of money you can potentially save? Can you imagine the amount of money you can contribute to your retirement or that holiday you always wanted to go? Can you also guess what are the type of loans behave like Reducing Balance loans? Check it out at the ANSWER below.

ANSWER HERE

• Fixed Line Loan – Car Loan, Personal Loan
• Reducing Balance Loan – Housing Loan

CONCLUSION

Are you surprised to see now like me, why some Personal Loans and Car Loans are using Reducing Balance loans? This is because Banks are becoming more generous when we get more Financially Literate.

Can you guess which are banks have started offering Personal Loans and Car Loans that are using Reducing Balance? Do COMMENT below and I will share with you those that I observe.

Do you also have something else that’s causing you to stress other than your primary debts? Could it be that some of your good debts have now become bad debts, causing negative ROI%?

Do share with us in the comment section. Share this & you may help a friend who may be struggling silently as a scam victim. You won’t believe how many I have met when they share with me in the 1 to 1 Private Consultation. This is so they can find help here – Our Debt Management Workshop (DMW) . (now renamed to Debt-Free Code Workshop)