EVER come across the terms “monthly rest interest” and “daily rest interest’”? These are terms you should look out for when shopping for a loan. They are basically calculation methods used by financial institutions to charge payable interest. Before we take a look into the differences of the two, it is essential we address the definition of “rest”.
Unfortunately, in this scenario, “rest” does not refer to relaxation. It is simply defined as the time frame at which the principal amount is reduced as you repay the loan.
The mechanics of calculation between the two are highlighted below:
I. Monthly rest interest
The interest of loan is calculated based on outstanding balance from the previous month.
II. Daily rest interest
The interest of loan is calculated based on the outstanding balance from the previous day.
Let’s take a look at the basic framework of how these two modes of calculations can affect what you pay to banks.
Interest calculation
“Ali has a home loan of RM500,000. The interest rate is set at 5% per annum with a tenure of 20 years. Based on the amortisation formula, Ali’s monthly instalment adds up to approximately RM3,299.78. Ali proceeds to pay his first instalment on the 15th of the month.”
A table of calculation breakdown is done based on the scenario above to give you a better picture.
• Monthly rest interest (Refer to Table 1)
• Daily rest interest
For the daily rest calculation, we have to first calculate the interest charged from 1st interest charged from June 1 to June 15 (Refer to Table 2)
Now let’s calculate how much is paid to the principal after paying off the interest from June 1 to June 15 (Refer to Table 3)
Now, let’s calculate the remaining interest for the rest of the month (Refer to Table 4)
To calculate the total interest paid for that month (Refer to Table 5)
Comparison of monthly rest interest versus daily rest interest (Refer to Table 6)
*Note : The number of days in a year used in daily rest interest calculations will vary from bank to bank. In this illustration, we used a total of 360 days in a year. In reality, banks may use a total of 365 days in a year to work out the daily rest interest calculations.
From the illustration above, Ali saves a grand total of RM4.37 when he pays his instalment on the 15th of the month. Based on the daily rest interest calculations above, you will see that the earlier payments are made, the more you save.
The savings of interest payable may not be significant in the short run (just RM4.37 in this illustration). However, the effect is compounded in the long run when you factor in the larger sum of principal reduced down the line.
Are daily rest interest rates really better?
It’s important to note that this is not a one size fits all scenario. The daily rest interest mode of calculation could also be a double-edged sword. Take a look at the habits below:
- Clears off monthly instalments in advance.
- Willing and able to make extra payment towards monthly instalments.
If your payment habits match the above then the daily rest interest mode of calculation is certainly beneficial.
However, if you don’t repay your instalments on time, you can end up paying more due to late payment penalties. Remember, the late payment penalties go up every day based on the daily rest interest, albeit at a marginal difference.
Conclusion
Pragmatically speaking, the daily rest interest serves as the superior choice due to its equitable calculations of interest payable.
Additionally, it is clear that your payment behaviour plays a big role in how much you save/lose. There are also several other factors to look out for, such as preference of flexi or non-flexi loan, lock in periods and other hidden fees or charges.
– To find out more about the best home loan interest rates in the market, visit www.loanstreet.com.my
– Loanstreet.com.my is a website that helps Malaysians compare and apply for loans online, free of charge.
Source: Loanstreet
