Pyramid Comment

This journal takes an alternative view on current affairs and other subjects. The approach is likely to be contentious and is arguably speculative. The content of any article is also a reminder of the status of those affairs at that date. All comments have been disabled. Any and all unsolicited or unauthorised links are absolutely disavowed.

Thursday, December 24, 2009

Amortisation: The Monster

The principle of amortisation explains the connection with usury as a blatant extra charge in excess of an agreed amount on (non-defaulting) payment. A method of raising the repayable charge that already includes interest.

Growth: The Cynical Illusion

The rise of the financial yoke has been facilitated by the computer. Nowadays, interest is calculated monthly or possibly even daily or hourly, adding an increased amount of interest by the process of amortisation. Without computers this would be totally impractical, but as with many inventions, they can be turned to how they can inflict control (maximisation of growth) rather than any real benefit. So it is with computers: they can be a benefit and a curse simultaneously. The exploitation of a concept by interest being added to interest. It's effectively a hidden charge. This can be construed as technical theft since the original loan is contracted on the understanding that it will attract interest. The interest-on-interest is not necessarily declared. Caveat emptor. This is the action that causes inflation. Growth. Without growth inflation would be zero. To then charge interest on the interest (amortise) defines that the interest levy is itself a loan. This clearly is not the case. The interest is the paid levy on a loan and is not a loan itself although that is how the lender (surreptitiously) interprets the amortised addition to the original loan.

How it works: as an example, consider a borrower who has negotiated a £10,000 loan and contracted to pay interest at 3%. In the first year the interest attracted would be £300, so the new payable amount becomes £10,300. This example is one of those where no capital repayment is required (interest only) as in a mortgage.

  • The student loan is different as it has rolling closure date that just moves and could effectively go on forever, just accruing (amortised) interest. Currently, the student loan interest rate has been set at 0% (1st September 2009 - 31st August 2010). This is reviewed every year for the entire academic year. Interest is accrued only above a threshold (£1250). So, a minimum repayment will reduce the loan liability the least and when interest is charged it will attract the maximum yield. Great care has to be exercised here as the rate changes annually. Historically, the rates vary considerably even if this is now set to 0% (2009 - 2010).
If the loan attracts interest monthly the total payable in that same year becomes a greater amount: 3% annually equates to = 0.25% per month. In the first month the new payable amount = £10,000 + £25 - an additional £25. The second month would then be £10,025 + £25.0625. This amount then equates to £10,050.0625 and so on.

1.    £10,000.0000 + £25.0000    = £10,025.0000
2.    £10,025.0000 + £25.0625    = £10,050.0625
3.    £10,050.0625 + £25.0650    = £10,075.1275
4.    £10,075.1275 + £25.0675    = £10,100.1950
5.    £10,100.1950 + £25.0700    = £10,125.2650
6.    £10,125.2650 + £25.0725    = £10,150.3375
7.    £10,150.3375 + £25.0750    = £10,175.4125
8.    £10,175.4125 + £25.0775    = £10,200.4900
9.    £10,200.4900 + £25.0800    = £10,225.5700
10.    £10,225.5700 + £25.0825    = £10,250.6525
11.    £10,250.6525 + £25.0850    = £10,275.7375
12.    £10,275.7375 + £25.0875    = £10,300.8250

So, in the first year the new amount has reached £10,300.8250 and not £10,300. This additional £0.8250 has grown and continues to grow for all the following years any of the original capital is not paid. This may appear to be an insignificant amount, but collectively across all the active loans a lender may have, it translates to a huge amount of inflationary income (presumably attracting corporation tax). Any increase in income by default is taxed. Increasing revenue without doing anything. But no new money, just redirection (redistribution) of others' finances. Any payment in excess of £25 would see the overall owed amount (slowly) reducing. If a repayment of, say £100 were to be paid every month, the situation would be quite different. The original loan and the monthly interest charge less the repayment results in (£10,000 + £25.0000) - £100 = £9925. It is not uncommon to add the first interest charge onto the capital before the repayment is deducted. If the repayment is credited before interest is levied, a lesser amount would be the result:

£10,000 – £100 = £9900 + £24.75 = £9924.75

In the first month, already the lender has charged an extra £0.25 (£9925 - £9924.75) for doing nothing more than charging on the original loan before there is an opportunity to reduce the capital by repaying a monthly installment. Finance has been extended for that month before the payment becomes due with interest. It would be 'interesting' to find out if payment at the beginning of a month would avoid the £0.25 since the full amount had not been borrowed for the entire month. Clearly, after the first month £9925 is the lesser amount compared to £10,025. The most prudent action is always to repay as much as possible to offset the mounting interest. This is one place where lenders ‘make’ their money. Another associated ‘money-making’ area is when banks pay interest on savings, but only annually. The banks do not entertain the concept of amortisation when they have to pay out interest (once annually) rather than collecting interest (1/12th monthly, but 12 times annually).

Mortgages operate in the same way and illustrates how an interest only repayment scheme may effectively reduce the monthly payment, but also how the capital by not being repaid results in the overall payable amount being much greater than a repayment mortgage. The endowment schemes played this game, but the end-of-term lump sum was supposed to pay off the original capital.