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Killing Me Softly

April 21, 2012

This appeared in the Moneysense Magazine Nov-Dec 2009 issue…

KILLING ME SOFTLY

by Edmund Lao

Killing Me Softly with His Song” is a 1971 song composed by Charles Fox and Norman Gimbel. It was inspired by Lori Lieberman’s response to having seen a performance by Don McLean particularly with his song “Empty Chairs”.  Said Lieberman: “I felt as if he knew me and his songs were about my life. I felt like he sang into my soul.”

It has been covered by numerous artists, most notably by Roberta Flack, whose version topped the U.S. pop singles charts, and won a Grammy Award in 1974.

Killing Me Softly is also a movie about a London website designer who faces deadly consequences for abandoning her comfortable and loving relationship with her boyfriend when she forms a dangerously obsessive bond with a handsome, mysterious mountaineer, who turns out to have some secrets.

Now consider the scenario below:

You are given a flyer that reads: “NEED CASH FAST? For as low as 0.99% a month , borrow up to one million. Or a call center agent calls you and says “Good news! You are pre-qualified/pre-approved for a loan without collateral of up to five hundred thousand pesos for only 1% a month. Take advantage of this precious opportunity”.

I have often been the recipient of these tempting offers before and even once I did not attempt to avail. One of my favorite references is the phrase “the borrower is the servant of the lender”, which is a good financial principle sourced from the Bible.  This simple phrase is so often neglected that majority go so deep in debt and they end up working hard just to pay off debt. In effect, they work for the lender. That is why every time I am offered a loan, I jokingly but politely decline by saying loan causes me skin allergy. Instead of irritating the agent on the other line, I often elicit laughter from them.

The scenario can be compared to agents singing us a serenade to lure us into giving in to their offer. There is nothing bad with their work but they do not realize that they are instruments in killing us softly with their song. Why did I say killing us softly? Because we are being offered a loan that applies the mysterious add-on rate (AOR)! For sure, the agents and majority of us do not have an idea what it is and how it works against us.  Once we avail of that loan, we re in no different situation to that of the website designer who obsessively entered into a dangerous relationship with a mysterious guy.

A perfect example of an add-on interest program is illustrated below:

Loan amount is thirty thousand pesos payable in a year. Payment will be two thousand five hundred for the monthly amortization and four hundred seventeen for the interest which is at 1.39% per month.

The table shows how the program works (add-on and diminishing balance) for a Php 30,000 loan :

AOR

DBM

Monthly

Monthly

effective

Monthly

effective

Principal

payment

Interest

 rate

Interest

rate

30000

2500

417

0.0139

417

0.0139

27500

2500

417

0.0152

382.25

0.0139

25000

2500

417

0.0167

347.5

0.0139

22500

2500

417

0.0185

312.75

0.0139

20000

2500

417

0.0209

278

0.0139

17500

2500

417

0.0238

243.25

0.0139

15000

2500

417

0.0278

208.5

0.0139

12500

2500

417

0.0334

173.75

0.0139

10000

2500

417

0.0417

139

0.0139

7500

2500

417

0.0556

104.25

0.0139

5000

2500

417

0.0834

69.5

0.0139

2500

2500

417

0.1668

34.75

0.0139

Balance

 0

Total

 

30,000

5,004

51.76%

2,710.5

16.68%

From the table, we can see that the monthly AOR is constant. It is because the interest is based on the loaned amount of thirty thousand no matter how small the balance after several payments. In effect, the smaller the balance, the higher the interest will be. The interest for thirty thousand is the same as that for five thousand!  To the uninformed, they think they had a good deal but upon analysis, they will find out that they are paying more than they should be. The reasonable way is to apply the diminishing balance method (DBM) where the interest is applied to the loan balance. This time, the interest rate will be constant and the monthly interest diminishes over time.

Sadly this is being used only in other countries but not here. By observing the table, we see that AOR is at least three times that of DBM. Now we all have an idea why we are stuck deep into debt especially with credit cards when we pay only the minimum amount due. We incur finance charge at the rate of 3.5% per month. That translates to at least 42% per annum interest. We are very happy paying interest that we thought was affordable, but in reality we pay double. That is why we are poor and the creditors are rich. This is a classic example of money working against us. Instead of money coming to our pocket, money unnecessary comes out of our pocket and into the lenders’.

Knowing the simple secret of the AOR, we are now armed with knowledge to avoid it.

Cancer is a disease which kills slowly and painfully. Add-on interest is also like cancer which kills our finance softly, slowly, and painfully.

As with our health, an ounce of prevention is a pound of cure, same goes with our financial health.

Now which loan is better, AOR or DBM? The answer is none. According to a Chinese proverb, No debt is better than good debt.  

Achieve financial success by learning to trust the author of wealth, God. Live by His money blueprint for us (the Bible), be frugal, build your investment fund and then eliminate loan/debt. Always remember debt is not a nice word since it sounds like death. To make it clearer, I have slightly edited a portion of the song below:

I heard he grants a big loan
I heard it’s AOR
And so I came to see it
To listen for a while
And there he was this young guy
A stranger to my eyes

Counting my debt with his fingers
Sealing my fate with a loan
Killing me softly with this loan
Killing me softly with this loan
Tearing my whole life with this loan
Killing me softly with this loan…

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From → add-on-interest

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