A group of Thai teachers is threatening to stop paying back loans to protest increasing interest rates. Many are barely able to make their minimum payments at current rates and any increase could force them to default. Thai teachers can make over 75,000B (2,260 USD) per month, so how did they get into this situation?
Obviously, not every teacher is making over 75,000B per month. Thai teachers start at 15,000B (450 USD) per month and it can take a long time to climb the salary ladder. At the same time, many government workers feel left behind by the modern economy. Their salaries have stagnated while the private sector has been reaping the benefits of the 16-fold growth in the Thai economy over the past 30 years. Watching their private sector peers drive new cars, buy new phones every year, and live in nice houses and condos creates a lot of envy. Combined with Thai culture and saving face, a perfect storm for bad financial decisions is building.
Teachers in Thailand are eligible for special loans from the Government Savings Bank without a credit check. One loan program, called the teacher’s funeral fund, makes up to 3 million Baht (90,000 USD) available to any teacher, even if their salary is the minimum 15,000B per month.
The average person lacks basic financial literacy, and when combined with the pressure of feeling left behind in a culture where material possessions equal status, it’s understandable why many teachers take advantage of the easy money available to them.
But committing to a long-term loan you don’t understand could be financially devastating. I already talked about why I decided not to get a large mortgage at 7% interest. The Bank of Thailand rate is a low 1.5%, but banks are charging 7% per year on zero-down mortgages – a recipe for disaster for the financially uneducated. And what happens when interest rates rise if you are already living on the edge like some teachers are?
Loan calculations are actually very simple. Percentages are taught in elementary school and you only need to know how to multiply and subtract on a calculator. Having said that, the effects of compound interest over decades is unexpected and still eludes most people.
Let’s look at one teacher’s loan that the Bangkok Post gave as an example. This particular teacher borrowed 1.2 million Baht (36,200 USD) and has been paying over 7,000B (210 USD) per month for seven years, but the amount he owes has only been reduced by 100,000B. This should be no surprise because his loan is performing exactly as expected. Even with 0% interest, it would take 14 years to pay back. So, with current interest rates close to 7%, it’s easy to see the principal would be paid off slowly.
If we assume he’s being charged 6.5% interest over 30 years his monthly payments are 7,584B. The annual interest at the start of the loan would be 78,000B, which works out to 6,500B per month.
The first monthly payment breakdown is as follows:
7,584B payment – 6,500B interest (1,200,000 x 0.065 / 12) = 1,084B paid on the principal. Loan amount owing is 1,200,000B – 1,084B = 1,198,916B.
The second payment is:
7,584B payment – 6,494B interest (1,198,916 x 0.065 / 12) = 1,090B paid on the principal. Loan amount owing is 1,198,916B – 1,090B = 1,197,826.
It’s evident that paying off 1.2 million Baht at 1,000B per month is going to take a long time. Even though he’s paying over 7,500B per month, close to 90% of his money is just paying the interest and only 10% is paying down the principal. The total amount of interest paid is over 30 years is 1.5 million Baht. Only the bank is benefiting from that loan.
Whatever he bought with this 1.2 million Baht loan, let’s say a car, for example, will end up costing over 2.7 million Baht by the time it’s paid off, or more than double its original value. At the same time, 30 years later the car will be almost worthless.
This is a clear example of why you should never finance consumer items that constantly depreciate with high-interest, long-term loans.
If you do have a car loan, pay it off within five years to minimize the interest paid.
There are websites that can quickly calculate loan amortization tables if you don’t want to do your own calculations. Here’s what Bankrate.com gives for the loan in our example:
Banks promoting these loans to financially uneducated teachers reminds me of stock trading courses. Newbies think technical price indicators, such as moving average convergence-divergence and the relative strength index, along with options and covered calls are on par with rocket science. It’s easy to convince inexperienced traders that huge profits are just around the corner. But in reality, they are all just simple math calculations or basic techniques. Real rocket scientists are now working on quant trading and have access to the fastest computers in the world that are plugged directly into stock exchange servers. How can the average person compete with that?
The same thing happens nowadays with loans. Loan amortization is just simple math, but the average person typically has no idea about interest rates and how expensive loans really are over decades. Inequality will get larger and larger as money is easy funneled up to the 1%. You have to become financially literate on your own because no one is going to protect you.
Conclusion – FIRE and Loans
Using loans to pay for unnecessary consumer goods is the antithesis of FIRE – Financially Independent / Retire Early. Investing regularly for the long-term means spending less than you make. If you need a loan to buy something, you most likely can’t afford it. Paying interest for decades for an item you can’t afford in the first place uses money you could otherwise put towards investing. At the same time, if you can barely afford your loan payments even at historically low interest rates, there is no way you can even start to think about accumulating wealth.