Should you settle your PTPTN loan early?

by - January 16, 2016


Short answer - NO

Let's talk about debt - PTPTN loan is the only option to further my study for people who can't write proper English like me.  For the past few years, PTPTN has offered 15-20% discount for early settlement and they even advocate payment with EPF! That is clearly pushing a near term solution at the cost of long term social risk.

If you want to find a financially smart person that refuse to settle loans. It would be me - no shame on that.

I am comfortable with paying my student debt montly with 1% interest.

Why? I did some reverse engineering calculation and find that it's NOT worthwhile to pay off your loan early by taking Present Value (PV) into account. PV* is what you really pay in today's term. Actually you don't need to go thru the hassle to know that. As long as we don't have a deflation case, you don't pay your low interest loan.

First, I consider the rate of inflation. While our official inflation is around 2.5-3.8%, I reckon that every urban dweller would agree that inflation is at least 5% for the past few years, if not 8%.

Taking 5% as the discount rate for a loan of RM40,000 - I would only pay RM981 extra if I drag the payment for 15 years versus paying once off. The best option to clear the loan actually happens between year 11-12 instead of the early years.  This has not even taken account of the interest earnings I could get for saving the money in a bank.

If I take 8% discount rate,  which is nearer to risk-free rate + inflation adjusted - I'll be gaining for not paying it early!

Isn't it truly a blessing to be a Malaysian? (Self-comfort of a non-bumi aka second class citizen)

Some people think it is a burden to be in debt for education loan, but so are housing loan, car loan, medical installment or your credit card balance - in any case, I rather be holding a 1% interest rate loan!

I deal with a lot of banking officers and they think I am poor when they hear I have PTPTN debts. Poor yet I never got rejected for any loan or premier card application. I feel the winning in me all the time. It's either you get it or you don't.

How about paying with EPF? I wouldn't recommend to do that, unless you are good managing your own money and somehow believe that your EPF fund will be an empty nest when you reach retirement 30 years later.

Hopefully, the plan will still be available 10 years later. As of now am committed to the turtle installment 1% interest rate plan. 

Note: Will revisit the decision if miraculously we have a deflation case.

You May Also Like

0 comments