This archive report was first published on 29 September 2019.
Published on September 29, 2019, a previous article on Nyakundi Report sparked a discussion about break-even periods and loan payments. One reader sought clarification on the terminology used, while another's calculation of monthly instalments was found to be incorrect.
When it comes to break-even analysis, the terms 'period' and 'point' are often used interchangeably. However, in the context of loan payments, the break-even period refers to the duration of time it takes for the rent received to exceed the interest paid. This is in contrast to the break-even point, which is commonly used in business to determine the point at which costs are equal to revenue.
Another reader's calculation of monthly instalments for a Sh8 million loan payable over 15 years at 14 per cent interest was found to be incorrect. The reader had divided the loan amount by 180 months to get the monthly principal payment, and then added the monthly interest to get a total of Sh137,000. However, this calculation assumes that the interest is charged on the entire loan amount throughout the loan period, which is not the case.
Most banks use a formula to calculate instalments, where the interest amount reduces and the principal component increases, but the total remains constant. This helps borrowers in planning future payments. In contrast, some banks may work out instalments by reducing the interest accordingly with every payment, resulting in decreasing instalments over time.
