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This is a statement in response to a letter to the editor, RE: Capitalisation Fees, published in the Post-Courier, page 11, Wednesday, December 18, 2019.
BSP’s Personal Loan Product has always been and still is a fixed interest product where the interest is calculated on the daily outstanding balance and charged monthly.
Loan repayments calculated on the value of the loan, the interest rate and the term of the loan are set prior to loan funding and the loan contract clearly states the amount of the loan repayment and the frequency of the payments. BSP customers generally request fortnightly repayments.
The fortnightly loan repayment consists of a component that covers the accrued interest and a component that covers the principal reduction. At the beginning of the loan, more of the repayment is allocated to interest and by the end of the loan, very little of the repayment is allocated towards interest.
This is because the balance of the loan in declining. The actual interest is charged at the end of each month and on a BSP Personal Loan statement this is displayed as “Capitalisation” although it is in fact interest.
Using a real example of a customer who borrowers K10,000 for a loan term of 24 months at our current personal loan interest rate of 27 per cent pa, the fortnightly repayments are set at K249.85 per fortnight. Over the term of the loan the customer would repay K12,992.20 (K249.85 x 52 fortnights). The additional K2,992.20 is the interest the customer pays for the loan over the 24 months.
To illustrate the reducing level of interest paid each month, I have used a real loan example. This loan for K10,000 was funded on 25 June 2019. The first repayment was due on July 4 and the first interest charge (Capitalisation) was made on July 31.
The interest charges to date have been:
n July 2019 (covering the period from 25 June to 31 July) – K265.94
n August (1 August to 31 August) – K214.71
n September (1 September to 30 September) – K200.43
n October (1 October to 31 October) – K199.28
n November (1 November to 30 November) – K185.27
Each month the interest component will continue to reduce provided that the borrower makes their payment on time, remembering that interest is calculated on the daily outstanding balance.
The method of interest calculation BSP uses for its loans – based on a reducing balance, is fairer than the approach taken by some non-bank lenders who calculate interest on the opening loan balance only. As an example, a lender advertising a rate of 1.5 per cent per month would equate to an interest rate of 18 per cent but on a loan of K10,000 over 24 months the interest cost would be K3,600 over 24 months compared to K2,992.20 in the BSP example used above.
A final point, While some conditions apply, BSP also includes at no additional cost to the personal loan borrower, a funeral benefit of K5,000 in the event that they die while the loan remains outstanding and extinguishes the outstanding balance should the death of the borrow occur. This is a real benefit to the borrower’s nominated next of kin.
Group General Manager – Retail Banking