Shall I Accept A Lower Loan Installment?

In view of the current low interest rates environment due to global economic crisis, costs of borrowings have become cheaper and if we were to base on the original loan facility agreement with the bank, the repayment period for the affected loans will be shortened, assuming the same amount of installment were to be paid each month. In some countries, banks are required to voluntarily reduce the monthly installment amount of loans so that the repayment period will not be shortened. In some cases, banks even allow troubled borrowers to stop payment for a specific period of time, or willingly negotiate with the borrower to restructure the terms of loan. The objective of this is simple, that is, reduce the burden on consumers and/or businesses in a challenging time like this.

Some people have sought my opinion whether to accept the reduction in installment amount. My answer to that is why not, even if one has no financial difficulties! After all, one could save a fair amount of commitment each month and assuming one has multiple loans (like myself), the amount of savings each month can be quite sizeable.

There are many advantages reduced commitment can bring to the equation. Among them include:
- excess funds for spending on goods and services. Flow of funds and spending are essential for the growth of economy. An environment without consumer and business spending will just make the already stale situation worse off!

- pay off debts which carry a higher interest rates than one's mortgage loan. Credit card debt is an obvious example. This could lead to significant savings in cost of debt.

- best of all, use the savings from the excess funds to invest wisely. Given that many investment grade assets have been bashed down badly during the past one to two years, great bargains are abundant! For instance, stockmarket is expected to give the best return once the global economy recovers. So for those who have not acquired the knowledge of investing, now is the best time to educate yourself, before it's too late!

Also, keeping extra cash in your pocket at the time of crisis is definitely a wise thing to do. After all, we will not know what may happen next. For instance, job retrenchment, business failure, etc, may just pop up down the road, especially if the economy gets worsen.

One word of caution though, do not expect every bank will voluntarily reduce the installment for you. I know for some banks, you will actually have to write in to request for the reduction. So do not just assume this will be done automatically. Go ASK YOUR BANK now!