With hire purchase loans where the interest is calculated at the start of the loan as simple interest based on the full amount of the loan over the repayment period. In this situation, there is no advantage in making additional payments in order to reduce the balance more quickly.
There are other types of loans, such as home loans, where the interest is calculated on a reducing balance. The lower the balance, the less interest you pay. In these types of loans, it is clearly an advantage to reduce the balance owing as quickly as possible. Making additional payments or increasing the monthly payment will result in paying less interest.
Note:
In general, loan repayments start one month after the loan was drawn unless otherwise clearly
stated. Hence the loan repayments start at T1, which is the end of the first month. It does not make any sense to take out a loan and immediately make a repayment.
In some situations, such as home loans, it can be arranged that the repayments only start three months after the loan is drawn, because a buyer will incur additional costs in the first few months of moving into a new house. However, interest is charged from the day the loan is received.
Similarly, in starting a business, it may be several months before the business starts producing an income, and the repayments on the loan can be deferred by negotiation with the bank or the financial institution.
No comments:
Post a Comment