Manila, Philippines

Longer Is (Not) Always Better

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Keep it short, stupid (or and simple). KISS, not just in writing, but in loan tenors too.
Longer is not always better. Not just in physical attributes and giftedness but in loan tenors too. They say you won’t feel it. I’ll say you’ll bleed before you know it.
Previously prescribed 3 to 6 month installment tenor for credit cards. Now let’s deal with loans.
Consider the following table, all assuming straight-line amortization:
Assuming same loan amount and same rate, longer tenor leads to lower amortization. Light on the pocket? You decide. Now see this.
Total Payments for the Whole Term and Total Interest Paid are staggering given the longer tenor. At 5 years, you end up paying almost double of what you borrowed. At 15 and 30 years tenors, you’ll bleed to death.
Effectively, a 1 year loan tenor is not really charged with 30% but 17% only. At 5 years, annual charge may be 19% and not 30%, but still cumulative interest payments almost double.
One may argue though that Examples 3 and 4 may be too exaggerated as tenors of 15 and 30 years are more applicable to home loans, with a lot lower interest rate since it has collateral. So here’s another example. Example 6 may be close to a usual bank auto loan while Examples 7 and 8 for a home loan, with loan value at Php 1M (very small property).
Still the same story actually. At 30 years, cumulative interest paid is PHP1.6M, 160% the initial loan amount.
So the next time you prefer longer tenors, think again. Loans can be used as powerful financial tools and leverage if you are informed.
It’s not just a matter of low amortizations that you cannot feel. You should also look at how much you will pay for the entirety. So the shorter, but still within your cash flow, the better.
If a long tenor cannot be avoided, make sure to request for rescheduling to shorter tenor every time your capacity to pay increases.
Explore whether partial prepayments (or advance payments on top of monthly amortization) can be made (e.g. during bonuses) to avoid paying too much interest.
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 Filipino Personal Finance

3 Responses

  1. Anonymous says:

    Can you expound on this, with in mind what is PAG-IBIG is offering? I mean, how or what should be the best track to do when availing of a PAG-IBIG housing loan. Thanks in advance

  2. Geri says:

    Hi. Not sure what you refer to as Pag Ibig's offer but bottom line is the shorter the loan tenor is (that still fits your monthly budget) the better. Long tenor means significant interest payments even if low rates. Quick way to check is by multiplying your amortization x 12 months x number of years to pay. Less this number with your loan amount and this amount is your interest expense.

    Having said this, one cannot always afford a short term loan more so a home loan. As such when cash flow permits, consider one off partial prepayments. Like using part of Christmas bonus to pay an amount on top of your usual monthly amortization.

  3. home loaner says:

    It's really difficult to avail and pay a home loan that's why Filipinos try to stretch their tenor as long as they can. But banks or lenders should inform them how much interest they end up paying because of this.

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