Many deals are structured with deferred payments at the start of the loan. It is a common practice to help the Company’s cash flow and give the borrower time to get the asset up and running before payments start.
With TValue, deferred payments are easy to handle, but two questions should be answered first.
Question number one: is the loan compound or simple interest? Our experience is that most loans that have deferred payments are simple interest or U.S. Rule.
Question number two: do you want to display interest accruals on the amortization schedule? Showing the interest accruals is often a useful presentation.
Either way, when you have deferred payments, the interest will accrue until the payments begin. The first payments will satisfy the interest first.
Let’s do a case study with a loan for $100,000 for 5 years at 8% with 6 months deferred payments, and principal and interest payments over the remaining 54 months. The 54 payments would be $2,298.65 per month for the 60-month term.
In the first presentation, we will start the Loan on June 1, 2023 and have the first Payment due on January 1, 2024. We are using U.S. Rule (simple interest) as the Compute Method.
As you can see in the Amortization Schedule, the interest has accrued in the Balance Due column and then the first two payments are effectively interest only payments with the subsequent payments paying principal and interest.
In the second presentation, you would add zero payments for the six months of deferred payments.
As you can see in the Amortization Schedule, the interest accrues each month and gets added to the Interest in the Balance Due column. As payments are made, the interest is paid before the principal.
Both presentations provide the same numbers and reflect the impact of the deferred payment period. The choice between the two presentations depends on whether you prefer to see the interest accrued during the deferred payment period or have it accumulated and paid off before the principal.
If you have any questions using TValue, please give our Support Team a call at 800-426-4741 or email support@TimeValue.com.