Question

The lower the average payment period, the better is a corporate borrower. Do you agree with this statement? Explain.   

Answer 1

Answer: not agree

Explanations:

#) the tenure or payment period of a loan decides how much periodic payments (interest + part of principal) would be paid by the borrower. Such periodic payments would be high if the repayment period is small – suppose for a loan of $5,000,000 at 10.5% annual interest rate, if the tenure is 20 years then the EMI would be $49,919; but, if the tenure is 15 years for the same loan the EMI would be $55,270 (calculations are done by the use of online EMI calculator). This excess periodic payment could be a burden for corporate borrowers, since arranging cash is difficult.

#) corporate borrowers always want to move the thing by paying less today, since every business has some uncertainty in future. Therefore, in order to earn (net earnings) better today and keeping adequate cash in hand, there must be smaller amount of payments today – this will not happen if the tenure getting lower.

In case of personal or individual borrowing smaller payment period is better, since a person may not want to continue the loan-burden for long because of uncertain future about own-income, health, mortality, etc.