European Journal of Economic and Financial Research ISSN: 2501-9430 ISSN-L: 2501-9430 Available on-line at: http://www.oapub.org/soc 10.5281/zenodo.221096 Volume 1│Issue 1│2016 LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? Ignacio, Ortiz-Betancourt1Ѱ, Arturo, García-Santillán2, Jesica J., Ramos-Hernández3, Martha, Zapot-Loissell4, Luis A., Huitrón Méndez4, Claudio, Morales López4 Professor in Economics’ Department 1 Researcher Professor and Doctoral program in Management Science coordinator 2 Second year doctoral student in Management Science at UCC Business School 3 Master in Finance student at UCC Business School 4 UCC Business School, Universidad Cristóbal Colón, Veracruz, México Abstract This paper aims to prove which could be the best financing option for individuals with low incomes seeking sources of funding, depending on their profile and according to the available options in the national financial system, specifically through commercial banks and non-bank financial institutions. For that, we develop scenarios to show the benefits provided in each case, using a payments scheme with overdue annuities. The result shows a better choice to get loan through non-bank financial institutions. Keywords: overdue annuities, interest rate, compound interest, loans Introduction Nowadays, the issue of financial education is discussed in several academic fields and also represents a priority on the global agenda. In recent years, it has increased the interest to know what is happening with people who have access to the financial system. Some authors like García-Santillán (2007); Bernheim and Garrett (2001) Lusardi and Mitchell (2006) have generated information about the financial behavior of people. The use of financial services among population is related to the demand for loans, savings and investment instruments. Therefore, the importance of providing financial services to the entire population, especially the lower income is recognized Ѱ Correspondence: email ignacio.ortizbetancourt@gmail.com Copyright © The Author(s). All Rights Reserved Published by Open Access Publishing Group ©2015. 109 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? today. An example of this is the link indicated by the Organization for Economic Cooperation and Development (OECD, 2015) between access to capital and human capital formation. Thus, self-employed individuals are constantly seeking founds in the popular savings cooperatives, to perform or provide services for productive project. According to Johnson and Rogaly (1997) the knowledge that people have about the real cost of borrowing is very low. The results show that only 42% calculates the sum of interest more capital and the causes for which acquired a loan of this type are, first, low interest, and the speed of funding approval; this, because accessing financing through commercial banks the process usually take longer when the authorization of a loan application from the list of requirements applying, contrary to savings Banks where the requirements are minimal. In this sense, Beck, Demirguc and Martinez (2007) note that some barriers such as maintaining a minimum balance, fees for account management and rigorous documentation exclude from the formal financial system a large percentage of the population in various countries. Considering the Mexican context, the study of savings has been approached by Villagomez (2011), who emphasizes its relationship with investment rates and economic growth. Also, Orozco (2008) emphasizes that access to financing is unequally. This fact, adversely affects the low-income population living in areas of low population density. From this growing interest of the Mexican population to access services offered by financial institutions for financing, analysis of this paper aims to serve as a reference in funding decisions that seeks to optimize interest payments. For all this, the question that we make is: In order to get a loan through Non-bank financial institutions and Bank Institutions, what’s the best choice? Methods To understand the concept of amortization we refer García-Santillán (2014) points who states that the amortization is associated with debt; besides, it refers to the gradual payment made to settle a debt coming generally from a loan or credit. In the business environment, it is common that companies and individuals keep seeking for credit for the acquisition of goods (assets). To calculate the amount of the installments must use the formula of Present Value of an overdue payment (Rp) from the following formula: European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 110 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE?   i 1  1  m NPV  Rp  i  m   n m      (1) To find the value of Rp, the value of the debt passes dividing the resulting factor: NPV Rp  n n m m i 1 1 i 1 1   m m i i m m Now the formula is become to get Rp: (2)     The variables used are:  NPV: Net present value of debt  Rp: The regular income to be paid during the term of financing  i: Nominal interest rate  m: Capitalization can be weekly, monthly, yearly, etc.  i / m: is the nominal rate  n: term of funding Here are two scenarios in which the amount of regular income to be paid in each period according to the capitalization of the same is determined. The first hypothetical scenario presented corresponds to the funding request with bi-monthly payments to a financial institution of commercial banks. This scenario suggests applying for a loan for $ 50,000.00 at a nominal rate of 25% within one year. We must determine the amount of the periodic audits to make interest payments to be made during the term of financing monthly payments. Given the above data, the development is as follows: Rp    6   .25 i  m    60  1  1  (0.04166667)   1  1  ( *60)   1   1  (    *60)  0.04166667 360 m               .25 i *60 m     360     $50, 000.00 $50, 000.00 $50, 000.00 $50, 000.00    Rp  6 1  1  (0.04166667)   1  .7827576    0.21724221  5.21381305       0.04166667   0.04166667  0.04166667    NPV n $50, 000.00 360 $50, 000.00  Rp  $9,589.91 In order to verify the above calculation, we proceed to perform the following Amortization Schedule (chart 1): European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 111 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? Chart 1: Amortization annuities overdue (Financial Institutions-Commercial bank) Payment No. Annuity Interest payment Capital Balance $50,000.00 1 9,589.91 2,083.33 7,506.58 42,493.42 2 9,589.91 1,770.56 7,819.35 34,674.07 3 9,589.91 1,444.75 8,145.16 26,528.92 4 9,589.91 1,105.37 8,484.54 18,044.38 5 9,589.91 751.85 8,838.06 9,206.32 6 9,589.91 383.60 9,206.31 00.00 $57,539.46 $7,539.46 $50,000.00 Total Source: own The second hypothetical scenario presented corresponds to the loan application with weekly payments to a savings bank serving. This scenario suggests applying the same amount of scenario one for $ 50,000.00 at a nominal rate of 25% within one year (weekly capitalization period). We must determine the amount of the periodic audits to make interest payments to be made during the term of financing monthly payments. Given the above data, the development is as follows: Rp    51.4285714    .25  7  1  1  (0.00486111)  1   1  (    *7)  0.00486111 360         .25 *7   360   $50, 000.00 $50, 000.00 $50, 000.00 $50, 000.00 Rp     51.4285714 1  1.00486111)   1  .77927263   0.22072737   45.4067738      0.00486111  0.00486111    0.00486111  Rp  $1,101.16 NPV   i  1  1  ( *7)  m     i *7 m   n m       $50, 000.00 360 $50, 000.00  In order to verify the above calculation, we proceed to perform the following Amortization Schedule: European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 112 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? Chart 2: Amortization annuities overdue (Non-bank institution) Payment No. Annuity Interest payment Capital 0 Balance $50,000.00 1 1,101.16 243.06 858.1 49,141.90 2 1,101.16 238.88 862.28 48,279.62 3 1,101.16 234.69 866.47 47,413.15 4 1,101.16 230.48 870.68 46,542.47 5 1,101.16 226.25 874.91 45,667.56 6 1,101.16 222 879.16 44,788.40 7 1,101.16 217.72 883.44 43,904.96 45 1,101.16 38.96 1,062.20 6,952.65 46 1,101.16 33.8 1,067.36 5,885.28 47 1,101.16 28.61 1,072.55 4,812.73 48 1,101.16 23.4 1,077.76 3,734.97 49 1,101.16 18.16 1,083.00 2,651.96 50 1,101.16 12.89 1,088.27 1,563.69 51 1,101.16 7.6 1,093.56 470.14 52 470.29 0.1 470.28 0 $ 56,629.45 $ 6,629.45 $ 50,000.09 Total Source: own Conclusion    As a result, performing calculations using the method of annuity due, the following results were obtained: The total amount to be paid at the end of the period of financing through commercial banks is $57,539.46; of which $ 50,000.00 corresponds to the principal payment and the remaining $ 7,539.46 is the total interest accrued during 12 months. The amount to be paid at the end of the period of financing through Non-bank financial institutions is $ 56,629.45; of which $ 50,000.00 corresponds to the principal payment, and the remaining $ 6,629.45 is the total interest accrued during the 12 months. Therefore, after comparing the results of both financings, we can say that the best option is hiring debt through popular savings box because there is least amount of interest paid. Therefore, should to consider the number of capitalizations when a funding request is carried out. We remember that, the higher number of capitalizations period payments, apparently are lower the payment of interest, which translates into a direct benefit in the personal finance of the population. European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 113 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? References 1. Beck, T., Demirguc, A. & Martinez, M. (2007). Banking Services for Everyone? Barriers to Bank Access and Use around the World. The World Bank Economic Review, Vol. 22, NO. 3, pp. 397–430. 2. Bernheim, B. & Garrett, D. (2001). The effects of financial education in the workplace: evidence from a survey of households. Journal of Public Economics 87(2003) 1487-1519. 3. García-Santillán A. (2007) Sistema financiero mexicano y el mercado de derivados. [Mexican financial system and derivatives markets] Euromediterranean Network. Universidad de Málaga. España ISBN: 13-978-84-690-7143-4 Registro en la Biblioteca Nacional de España: 07/60277. Retrieved from: http://www.mexder.com.mx/wb3/wb/MEX/ligas_interes 4. García-Santillán, A. 4 “Matemáticas Financieras para la toma de decisiones” [Financial Math for making decisions]. Euro-Mediterranean Network. Universidad de Málaga. España ISBN-13:978-84-16036-61-5 Registro en la Biblioteca Nacional de España Nº 2014/60144. Retrieved from: http://www.eumed.net/libros-gratis/2014/1406/index.htm 5. Jhonson, S. & Rogaly, B. (1997) Microfinanciamiento y reducción de la pobreza, Universidad de Colima. 6. Luisardi, A. & Mitchell, O. (2006). Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs. Michigan Retirement Research Center Research Paper No. WP 2006-144. http://ssrn.com/abstract=957796 or Available at SSRN: http://dx.doi.org/10.2139/ssrn.957796 7. OECD (2015). OECD Economic Surveys Mexico. January 2015 Overview. Retrieved from: http://www.oecd.org/eco/surveys/Mexico-Overview-2015.pdf 8. Orozco, R. (2008). Canales alternativos de acceso a servicios financieros. http://www.banxico.org.mx/publicaciones-yRetrieved from: discursos/publicaciones/seminarios/modernizacion-e-inclusion-financiera-enamerica-la/%7B9EA6A714-9D3F-227B-CF8C-C4FA5E0968E5%7D.pdf European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 114 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? 9. Villagómez, A. (2011). El ahorro en México. Tintero Económico. Diario el Universal. Retrieved from: http://archivo.eluniversal.com.mx/columnas/88864.html European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 115 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? Appendix Amortization (overdue annuities) Payment no. Annuity Interest Capital Balance 0 50,000.00 1 1,101.16 243.06 858.1 49,141.90 2 1,101.16 238.88 862.28 48,279.62 3 1,101.16 234.69 866.47 47,413.15 4 1,101.16 230.48 870.68 46,542.47 5 1,101.16 226.25 874.91 45,667.56 6 1,101.16 222 879.16 44,788.40 7 1,101.16 217.72 883.44 43,904.96 8 1,101.16 213.43 887.73 43,017.22 9 1,101.16 209.11 892.05 42,125.18 10 1,101.16 204.78 896.38 41,228.79 11 1,101.16 200.42 900.74 40,328.05 12 1,101.16 196.04 905.12 39,422.93 13 1,101.16 191.64 909.52 38,513.41 14 1,101.16 187.22 913.94 37,599.47 15 1,101.16 182.78 918.38 36,681.08 16 1,101.16 178.31 922.85 35,758.23 17 1,101.16 173.82 927.34 34,830.90 18 1,101.16 169.32 931.84 33,899.05 19 1,101.16 164.79 936.37 32,962.68 20 1,101.16 160.24 940.92 32,021.76 21 1,101.16 155.66 945.5 31,076.26 22 1,101.16 151.07 950.09 30,126.16 23 1,101.16 146.45 954.71 29,171.45 24 1,101.16 141.81 959.35 28,212.09 25 1,101.16 137.14 964.02 27,248.08 26 1,101.16 132.46 968.7 26,279.37 27 1,101.16 127.75 973.41 25,305.96 28 1,101.16 123.02 978.14 24,327.81 29 1,101.16 118.26 982.9 23,344.91 30 1,101.16 113.48 987.68 22,357.24 31 1,101.16 108.68 992.48 21,364.76 32 1,101.16 103.86 997.3 20,367.45 33 1,101.16 99.01 1,002.15 19,365.30 European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 116 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? 34 1,101.16 94.14 1,007.02 18,358.28 35 1,101.16 89.24 1,011.92 17,346.36 36 1,101.16 84.32 1,016.84 16,329.52 37 1,101.16 79.38 1,021.78 15,307.74 38 1,101.16 74.41 1,026.75 14,281.00 39 1,101.16 69.42 1,031.74 13,249.26 40 1,101.16 64.41 1,036.75 12,212.50 41 1,101.16 59.37 1,041.79 11,170.71 42 1,101.16 54.3 1,046.86 10,123.85 43 1,101.16 49.21 1,051.95 9,071.90 44 1,101.16 44.1 1,057.06 8,014.84 45 1,101.16 38.96 1,062.20 6,952.65 46 1,101.16 33.8 1,067.36 5,885.28 47 1,101.16 28.61 1,072.55 4,812.73 48 1,101.16 23.4 1,077.76 3,734.97 49 1,101.16 18.16 1,083.00 2,651.96 50 1,101.16 12.89 1,088.27 1,563.69 51 1,101.16 7.6 1,093.56 470.14 52 470.29 0.1 470.28 0 6,629.45 $ 50,000.09 $ 56,629.45 $ European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 117 Ignacio, Ortiz-Betancourt; Arturo, García-Santillán; Jesica J., Ramos-Hernández, Martha, Zapot-Loissell; Luis A., Huitrón Méndez; Claudio, Morales López – LOANS UNDER SCHEME OVERDUE ANNUITIES THROUGH NON-BANK FINANCIAL INSTITUTIONS AND BANK INSTITUTIONS. WHAT’S THE BEST CHOICE? Creative Commons licensing terms Authors will retain copyright to their published articles agreeing that a Creative Commons Attribution 4.0 International License (CC BY 4.0) terms will be applied to their work. Under the terms of this license, no permission is required from the author(s) or publisher for members of the community to copy, distribute, transmit or adapt the article content, providing a proper, prominent and unambiguous attribution to the authors in a manner that makes clear that the materials are being reused under permission of a Creative Commons License. Views, opinions and conclusions expressed in this research article are views, opinions and conclusions of the author(s).Open Access Publishing Group and European Journal of Economic and Financial Research shall not be responsible or answerable for any loss, damage or liability caused in relation to/arising out of conflict of interests, copyright violations and inappropriate or inaccurate use of any kind content related or integrated on the research work. All the published works are meeting the Open Access Publishing requirements and can be freely accessed, shared, modified, distributed and used in educational, commercial and noncommercial purposes under a Creative Commons Attribution 4.0 International License (CC BY 4.0). European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016 118