This article was firstly published on SmartInvestor on 21st January 2021.
Soon after the Budget 2021 was announced last November, there have been various debates in the public sphere about whether one should extend or reschedule loan repayments during this challenging time brought on by the Covid-19 pandemic.
I would like to share some of my thoughts pertaining to this topic with a view to shed some light into this perplexing and sometimes daunting matter.
Borrowers facing retrenchments and / or salary cuts would surely opt to apply to extend the loan moratorium or to reschedule their current loan repayments. Business owners facing poor sales will certainly look to do the same as well. It’ll be a huge responsibility to keep up with loan repayments with a small or rapidly depleting emergency cash fund. In addition,property investors holding a handful of property loans may face the same predicament if rental collection is severely affected during this time.
Check with your bank first
If you do opt to take up the loan moratorium or rescheduling of loan repayments, this would ease your financial burden for the next six to nine months at least. This will allow for a temporary respite from financial stress so that you can focus on developing new working or business opportunities to compensate for the earlier loss of income.
However, you should bear in mind that the outstanding amount of the principal loan will be scaled up due to the deferred repayments. Banks may stretch the loan tenure or increase monthly repayment installment in the future to compensate for the scaled up principal loan outstanding amount. Of course, this will vary depending on the bank issuing the loan, so it’s best to check with your respective bank to learn exactly how this is calculated.
Does it Affect Your Cash Flow?
Now, what happens next? Firstly, plan your cash flow for the following six months. Review the status after three months to adjust for any eventualities, i.e. after you secure a job and / or restarting of business. If your financial status is still in limbo after six months, you may need to reconsider other options to deal with the various financial challenges, such as seeking assistance from AKPK.
Borrowers who are less affected by the Covid-19 pandemic should continue to service their loan repayments accordingly. If you haven’t suffered a significant salary cut, are running a business that continues to do well, or are collecting rent from properties as usual, you should not opt for a loan moratorium. This will definitely help to reduce your principal loan outstanding as what they have planned before the pandemic crisis, hence saving more interests too.
Furthermore, banks’ lending rates have been lowered more than 1% in 2020, which means loan instalments were also revised downwards accordingly. If you continue to service your loan repayments, you may even experience extra savings from your allocated monthly loan instalment repayments.
To compound this further, you could also make good use of the extra savings after the revised monthly instalments by either making extra prepayments on the existing loans to further reduce the interest and pay off the debts earlier, or using the extra savings to top up investments accounts in shares and unit trust to enhance your wealth accumulation.
2020 was a challenging year for everyone, physically, mentally and financially. We may feel helpless at times when circumstances are not being favourable to us. However, we can take charge of our own financial destiny through proper budgeting and reviewing your short, medium and long-term financial goals. Financial education, good financial management and practice is a lifetime learning process. It’s never too late to manage your own finances; don’t wait, just do it!