Though the question been asked about 4 years back, I still find it relevant and it's important to highlight how best to manage our personal debt. The decision making is certainly simple to understand, but the action might not be easy to execute. So it's always advisable to consult a qualified financial planner to set up a financial plan that tailor-made to your unique situation.

The Question!

"I just graduated from a local university with a interest-free tuition fee loan when I was a full-time student. However, my loan which is about S$50,000 will be interest-bearing from 1st August 2012.

The interest rate will be at prime lending rate (board rate) at 4.75% per annum.

I can choose to pay a minimum amount of S$100 monthly for a maximum of 5 years.

I can also choose to defer payment till August 2014, which means I can start to pay S$100 monthly from 1st August 2014, but interest will still be incurred during the 2 years when I didn't make any monthly payment. (But of course I cannot choose to pay minimum of S$100 as this amount is not sufficient to fully repay everything within 5 years) Currently, I have a total liquid assets of S$100,000 including:

S$35,000 cash

S$15,000 fixed deposit (matured in July 2013)

S$50,000 of stocks (most of them are blue chips, high-yield such as Singtel, Starhub, SPH, Singpost and REITS which are now all above at least 10% above the price I had bought).

I would like to ask if I should pay all the S$50,000 before the interest commence, or should I do otherwise? Thanks!"

If Mr. X want to be debt free, then I would suggest he fully paid off his loan.

This is one of the options. Debt free is a important criteria of financial independence!

Another option is for him to pay off his loan over the next five years, if Mr. X want to feel "cash-asset". So with this available cash at hand, he could invest his money to get a better return, subject to his risk appetite. Five years is a reasonable horizon to get his money invested.

However, first thing first.

Debt is not an issue, it is managing the debt that might post a potential issue.

So first question is to find out whether he can afford to pay the $100 monthly repayment.

If he can, then the next question is how comfortable is he to pay the extra on his monthly repayment? Meaning to say, have a higher monthly repayment, say $200 per month. This will shorten the loan tenure.

If he preferred to be debt free, my answer is obvious as mentioned earlier.

Second question if the debt is manageable, then it's a question of what is his attitude towards investment risk?

Cash in one hand, loan on the other.

Then he need to ascertain his target rate of return for his money to work for him. In this case, the loan rate is 4.75%, so if he is targeting to get that extra 20%, then his targeted rate of return shall be at least 5.7%. (4.75% x 120%)

He can't get these type of returns without taking any risk!

As the interview was done in Mandarin, I managed to After that I got my helpful colleguae, Ms. Angela Dou, to translate it as follows:

"如果 X 不想有债务在身，我建议他一次性付清他的贷款，这是其中一个选择。

如果他想持有现金资产，那他可以选择在5年内还清贷款。

当手上持有现金资产时， 他可以根据自身的风险偏好，用这笔现金进行适当的投资，来取得更好的投资回报。我认为5年的时间是一个合理的投资期。

然而，首先要了解的是：

债务本身不是问题，问题是如何管理债务，不当的管理会带来潜在的问题。

所以，首先要了解，X 是否可以承担每个月100块的分期付款债务。如果他可以，那么接下来就是要了解，他是否愿意增加每月还款额，比如说，每个月还200块，这样可以缩短他的贷款期限。

如果他不想有债务在身，正如我 之前所讲的，他可以选择一次性付清贷款。

债务是可以管理的，问题是他在面对投资风险时的态度和承受能力。

如果他既有现金资产，又有贷款，在进行投资时，他需要确定一个目标投资回报率。在这个案例中，贷款利率是 5.00% (4.75%)，如果他想获得格外的20%的回报，那么他的目标投资回报率至少要在 6.00% (5.7%) 以上。要想获得投资回报，不要承担风险是不可能的。"