Confusion about loan interest

[Na Fan]

So there's a personal loan, 600'000 THB with a bank.

 

According to some quick research, the max allowed interest rate for such a loan is 15%.

 

However, 8 payments have been made into repaying said loan, 8x 16'000 = 128'000 and the loan "balance" has only come down to 564'000.

 

Apparently the loan is for 71 instalments, 16k each - so that is a total of 1.136 million THB.

 

How is that 15%? That is more like 100% extra interest ?

 

Can someone please ELI5 that?

 

 

[motdaeng]

a loan of 600,000 thb with 71 installments of 16,000 thb results in an annual rate of 24.28% interest! (total 1'136'000 thb)

 

 

 

 

[Na Fan]

1 minute ago, motdaeng said:

something doesn't add up... 

 

a loan of 600,000 thb with 71 installments of 16,000 thb results in an annual rate of 24.28%!

 

 

 

 

 

A lot doesn't seem to add up for me, either.

[motdaeng]

maybe it's similar to a car loan in thailand: they tell you the interest rate is 4%, but you have to pay

this 4% on the original loan amount from the first to the last installment. in reality, the effective interest

rate is closer to 8%. most people don't realize this, and think 4% is a good deal ... !

[motdaeng]

i think i've figured it out, with a difference of a few hundred baht:

 

- loan amount: 600,000 thb at 15% interest for 12 months = 7,500 thb interest per month

- total interest: 71 x 7,500 thb = 532,500 thb + 600,000 thb = total sume of 1,132,500 thb.  
- monthly amortisation: 600,000 thb over 71 months = 8,450 thb per month.

- total monthly payment: 7,500 thb (interest) + 8,450 thb (amortisation) = 15,950 thb.

- your balance is reduced by 8 x 8,450 thb - 600,000 thb = 532,400 thb.

 

conclusion: in real you're paying around 24% interest!

 

[Na Fan]

4 hours ago, motdaeng said:

i think i've figured it out, with a difference of a few hundred baht:

 

- loan amount: 600,000 thb at 15% interest for 12 months = 7,500 thb interest per month

- total interest: 71 x 7,500 thb = 532,500 thb + 600,000 thb = total sume of 1,132,500 thb.  
- monthly amortisation: 600,000 thb over 71 months = 8,450 thb per month.

- total monthly payment: 7,500 thb (interest) + 8,450 thb (amortisation) = 15,950 thb.

- your balance is reduced by 8 x 8,450 thb - 600,000 thb = 532,400 thb.

 

conclusion: in real you're paying around 24% interest!

 

I'm afraid to say that what you are saying makes a lot of sense! Thank you for spending your time for that.

 

Looks like somebody has gotten screwed 😞

[Na Fan]

But hmm..

 

7500 interest per month and 8 months have been paid, at 16000 per month.

 

The actual loan amount has only gone down to 564000.

 

If what you were saying was exactly how it worked, the loan amount would have to be different.

8x 7500 (interest) + 8x 8500 (loan back pay)

Total interest paid: 60000
Total loan paid back: 68000

 

So the remaining amount would have to be 532000? We're missing 32000 ?

 

Are they taking more money for interest initially ? That feels wrong / illegal to me?

 

 

[CallumWK]

OP should have been given a document that clearly shows how much capital and interest each payment consists of.

 

The earlier payments will have more interest and less capital. To the end of the term each monthly payment will have more capital and less interest

[Etaoin Shrdlu]

10 minutes ago, CallumWK said:

 

 

The earlier payments will have more interest and less capital. To the end of the term each monthly payment will have more capital and less interest

 

That's not how interest is calculated on many consumer loans in Thailand. Motdaeng is correct as far as car loans and many consumer loans are concerned.

[Na Fan]

Quote

That's not how interest is calculated on many consumer loans in Thailand.

But it sure seems to be exactly what is happening here?

[NoDisplayName]

Loan Calculator

Amortized Loan: Paying Back a Fixed Amount Periodically

 

https://www.calculator.net/loan-calculator.html?cloanamount=600%2C000&cloanterm=5&cloantermmonth=11&cinterestrate=24.28&ccompound=monthly&cpayback=month&x=Calculate&type=1#monthlyfixedr

 

See above link at 24.285% APR, compounded monthly.

Cclick to see the amortization table, at 8 months, balance would be 566,855.74

 

credit card interest rates cannot be higher than 16% (down from 18%), and personal loan interest rates from commercial banks are now a maximum 25%.

https://lawzana.com/articles/thailand/new-interest-rules-for-loans-in-thailand-11

 

What does the loan contract state?  I believe the maximum rate for private loans is 15%, but apparently the banks have connections with the folks writing the laws.....

 

 

 

[arick]

13 hours ago, motdaeng said:

i think i've figured it out, with a difference of a few hundred baht:

 

- loan amount: 600,000 thb at 15% interest for 12 months = 7,500 thb interest per month

- total interest: 71 x 7,500 thb = 532,500 thb + 600,000 thb = total sume of 1,132,500 thb.  
- monthly amortisation: 600,000 thb over 71 months = 8,450 thb per month.

- total monthly payment: 7,500 thb (interest) + 8,450 thb (amortisation) = 15,950 thb.

- your balance is reduced by 8 x 8,450 thb - 600,000 thb = 532,400 thb.

 

conclusion: in real you're paying around 24% interest!

 

That's exactly what they do if taking a motorbike or some car loans. Go to a motor bike shop and ask them will give you a loan for double the amount of the bike.  

[Sharp]

Always ask for a loan "Amortization" it will show you all you need to know  

[Gsxrnz]

Most personal loans are repaid under what is known as the Rule of 78. This means that the early instalments are predominantly interest, and the later installments are mainly principal. It's been around forever, and always surprises people who don't really understand debt and amortization.

 

Your loan interest and repayment calculation is (600,000 x 15%p.a.) x 6 years, divided by 72 months.

 

Total interest is 540,000

Total Debt is 600,000 plus 540,000 being 1,140,000

Monthly repayments circa 15,833

Could be different if they roll insurance or bank charges on top.

 

Here's a link that may explain it better.  Rule of 78: Definition, How Lenders Use It, and Calculation (investopedia.com)

 

EDIT: thought I would add this for clarification. Rule of 78 effectively smooths out the overall debt to make the monthly payment a fixed amount, and more manageable over time.  If the loan was standard amortized principal and interest calculation, the first monthly payment would be 8,333 principal and 7,500 interest. The very last payment would be 8,333 principal and 104 interest.

 

If the loan is held to maturity, you really will pay 15%p.a.  If the loan is repaid earlier, you will have paid more than 15%. Repay very early, and you will have been financially raped by the bank, but that's banking for you.

[sometimewoodworker]

If talking about a car loan in Thailand the term interest is used however the way the Thai system functions is totally different from the way the majority of the western world uses the word interest.

 

So you have in practice “Thai interest” and interest 

in the west interest is calculated periodically sometimes day by day 

in Thailand Thai interest is calculated once at the start of the loan

 

so in the west when you pay off in ½ the time the total you pay drops

in Thailand it doesn’t matter if you pay off in half the time total you pay is the same

 

So the term interest used in Thailand would be more logically be a loan arrangement fee.

 

ignore all the loan interest calculation apps and websites unless and only unless they are specifically designed for Thailand. The vast majority of them are program to allow for a decreasing capital amount reducing the amount of interest paid.

 

 

 

[john donson]

24% to pay and still  some say thai banks cannot afford to give more then 2%, sadly my home country banks also give around that miserable 2%