TANANOMICS: Moratorium Redux

TANANOMICS: Moratorium Redux


It’s been a while since I did a TANANOMICS post as the audience for these are vastly smaller than the small one for my reviews, memes and random schupidness. However, the CBTT in its magnanimity published guidelines to financial institutions on how to provide payment relief to the weary public. As expected there are esteemed, learned, social media scholars who are busy in their comment section classrooms leading people to believe that the last time these deferrals were allowed it was done for free. They are peddling such nonsense as “the bank didn’t charge me anything, the payments were just paused for 3 months and my payback period extended for 3 months…WITH NO COST TO ME”.

Some of us know that is not the case from experience. Some of us have received the call from the bank at the end of the deferral period asking “so meh boy, when you want to pay that extra interest, now or at the end? Ha Hai!!” So I said to myself “self, we might not have studied finance at the hallowed halls of ‘Talking Out We Bottom’, but we do know how to build an amortization table”. So for those who don’t believe or would like to see it for yourself, this post is for you.

Let me set the scene:

You’ve take a loan of $100,000 for a period of 5 years (60 months) to set up a Chilli Bibi company. Since this is a must win business the bank only decided to charge you 5% in interest. Then Covid-19 restrictions caused you to have trouble making the usual Chilli Bibi money hand over fist. Not to worry, here comes mister bank in month 13 with his offer of payment deferral.

Now let me just state that, according to the CBTT guideline, deferrals are only available to persons whose account is in good standing and they have to “opt-in”, as in, the bank can’t just decide TANA is deadbeat and give me a deferral. No I have to decide I’m a deadbeat and ask for one. I’m not saying you’re a deadbeat if you need a deferral, as always I’m referring to myself.

Anyway, here’s the payment breakdown.

I hid some rows to make the table readable but from it you should notice a few things. First there are no payments in months 13 – 15 thanks to the generosity of Mr. Bank. Next, your total monthly payment amount remains the same and your loan is extended by the length of the deferral (in this case 3 months). However, there’s no change in the balance outstanding during the deferral period either and this is the amount you pay interest on. Therefore, while you make no payments during the deferral period, the interest is still accumulating (“accruing” we does call it in finance). So while it is true you pay nothing upfront or at the end and it seems as though you paid the same amount you actually paid more in interest.

Now this analysis comes with caveats. The amount of extra interest you pay would depend on the terms of your loan (size, interest rate etc.) and where you are in the repayment schedule.

Bottom-line, deferrals aren’t about loan forgiveness, they’re about helping you with cash flow. Interest is the price of money and you pay based on how much you owe. Deferrals remove the immediate need to pay but does not reduce your debt, so unless otherwise stated, your interest will continue to run.

Bottom bottom-line, make sure you understand what you’re signing up for. Understand the terms of the deferral and how it would impact you. Who knows, maybe the financial institutions would give us free money this time.

TANA

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