How It Works: Interest-Only Loan Repayment (Deferring Principal Payments For Business Loans)

This is a continuation of our previous article “COVID-19: Singapore SMEs Can Now Apply To Defer Payments On Their Property Loans”.

To recap, the Monetary Authority of Singapore (MAS) announced on 31st March 2020 that SMEs can now opt to defer principal payments on their secured term loans until 31st December 2020.

However, SMEs will still have to service interest payments on the loans.

Local banks DBS and OCBC have gone one step further than the MAS directive, by either:

1. allowing SMEs to also apply to defer principal payments for their unsecured loans, or
2. allowing SMEs to service only interest payments for all new loans for up to 12 months.

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What is a Interest-Servicing-Only Repayment Plan?

As the name suggests, interest-servicing-only repayment plans will allow borrowers to pay only the interest portion of their loans.

Most loans in Singapore (business or consumer loans) are amortized, which is an accounting technique used to pay off debts through the regular principal and interest payments over time. This can be represented through an amortisation table/schedule.

By servicing only interest payments, an SME’s total debt (or loan principal) will not be reduced.

However, it will allow the SME to pay a much lower monthly repayment amount. This helps to preserve the cash flow of the business.

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Normal Loan Repayment Plan (Principal & Interest Payments)

Loan Terms

• Loan Quantum: $50,000
• Loan Tenor: 1 year
• Interest Rate: 4.75% effective

Loan Repayment Details

• Monthly Repayment = $4,274.65
• Total Repayment = $51,295.80
• Total Interest Paid = $1,295.80

Loan Amortization Schedule (Normal Loan Repayment)

‍Disclaimer: Data presented in this table are estimates and meant solely for general information purposes.

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Due to the lack of space, we shall not explain the mathematical formula used to derive this table of information. If you would like to create your own tables, please search for “loan amortisation tables”.

For more information about amortisation tables, please feel free to contact us.

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Interest-Only Loan Repayment Plan (Interest-Servicing for 6 Months)

Loan Terms

• Loan Quantum: $50,000
• Loan Tenor: 1 year
• Interest Rate: 4.75% effective
• Interest Servicing Period: 6 months

Loan Repayment Details

• Monthly Repayment
• First 6 months = $197.92
• Next 6 months = $8,449.16
• Total Repayment = $51,882.48
• Total Interest Paid = $1,882.48

Loan Amortization Schedule (Interest-Servicing for 6 Months)

‍Disclaimer: Data presented in this table are estimates and meant solely for general information purposes.

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Pros and Cons of Deferring Principal Payments on Loans

Advantages

1. Lower current liabilities

Disadvantages

1. Higher total interest payable for the same loan terms
2. Larger monthly repayment amount after moratorium on principal payments
3. If the borrower chooses to repay the loan over the same time frame
4. Longer repayment period
5. If the borrower chooses to extend the loan terms, by the same period of principal payment moratorium, to obtain the same monthly repayment amount as the original loan terms

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Conclusion: Should You Defer Principal Payments?

At this point in time, with COVID-19 raging on and the upcoming recession, we believe that SMEs should take this deal (if offered) to stabilise their cash flow in order to allow business operations to continue.

While borrowers may have to pay a higher total interest, this is offset by the record low interest rates offered by the banks.

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Request for a Business Loan Now!

Lendingpot.sg operates a Business Loan Marketplace that allows an SME to connect to multiple lenders with just one application, allowing the SME to know who its prospective lenders are and the rates that they offer, in a very short time.

     Apply Now!