The Nuances of Periodicity, or What Else Is Hiding Behind the Interest They Promise to Pay You Later?

"Rontgen" CEO Martynas Stankevicius

People who have only dealt with term deposits are used to their earnings being paid out once, at the very end of the term. However, this principle has several drawbacks in other increasingly popular investment areas — bonds or crowdfunding.

A loan with, say, 8% annual interest is understood by most people to mean that the invested amount will earn eight percent over the year.

However, changing one criterion — which at first glance seems insignificant to many — can significantly change the investment's risks. This criterion is the frequency of payments, i.e., whether interest is received monthly, quarterly, semi-annually, or only once, at the end of the investment term.

Investors who typically began their acquaintance with finance through term bank deposits tend not to even question the frequency of interest payments. It may seem natural to them that all earned returns are paid out in a single lump sum when the investment project concludes.

That's why, in recent years, crowdfunding platforms' or bond issuers' projects offering monthly or quarterly interest payments have sounded like a pleasant surprise to the public. After all, if the borrower repays part of the invested capital earlier, it can immediately be reinvested and thus earn even more.

However, since 2025, the debt market has gradually seen a growing number of investment offers in which all interest is paid only at the very end of the term. This trend calls for a discussion of the causes and consequences of both scenarios.

Nothing but advantages

Periodic and more frequent interest payments have no drawbacks from the investor's perspective. The most obvious benefit is the opportunity to receive expected earnings sooner, thereby increasing overall investment profitability. Following the example of 8% annual interest above, in practice this can turn into a return of nearly 8.25% if the interest received every three months is reinvested into projects with similar profitability.

It's also important that periodically paid interest allows for a better understanding of an investment project's "health." If a quarterly payment fails to arrive, the investor can raise questions with the loan operator, who can then take proactive steps to manage the situation. When interest is paid only at the very end of the project, the loan may appear legally and emotionally "healthy" throughout this entire time, even though problems could have begun much earlier and eventually become unsolvable.

From a financial standpoint, periodic interest payments do not worsen the financed project's loan-to-value (LTV) ratio. If interest payment is scheduled only for the end of the term, all that money effectively adds to the project owner's nominal debt and reduces the reserve available in case of recovery efforts. In turn, periodic payments prevent the debt from growing due to accumulated interest and maintain a larger gap between the loan amount and the value of the pledged asset.

Continuing with the 8% annual interest example, simply due to postponing interest payment to the end of the term, an LTV ratio that would be considered solid at 70% over two years effectively turns into a figure of 86%, which leaves much less of a reserve.

Incidentally, some investors ask where periodic interest payments come from if, say, a project is still under construction and not yet generating income. Various scenarios are possible here: the interest may be reserved as an undisbursed portion of the loan by pledging additional assets, or it may be paid from the borrower's income from other properties or businesses they own. A responsible operator will not allow periodic payments to turn into a "pyramid scheme."

Why this is happening and how to act

Recently, the Lithuanian debt market has been seeing more offers where interest is only scheduled for the end of the term. This is primarily linked to growing competition among financial companies for the opportunity to finance projects.

For borrowers themselves (e.g., real estate developers), deferring interest to the end of the term has no drawbacks — it allows them to worry less about cash flow and, generally speaking, push potential concerns into the future while saving money. In turn, financial companies may present such projects to investors as standard, without explaining the new risks that arise from deferred interest.

Therefore, in today's market — as the housing segment enters a more moderate phase — investors should first pay attention to the aspect of interest payment frequency: when and how often it is paid, and whether this has changed compared to previous investments.

For the reasons discussed, investors should, as a standard rule, be recommended to choose projects with a monthly or quarterly payment schedule. Investments with deferred interest are not inherently "bad," but the additional risks and forgone opportunities should be priced accordingly and, more importantly, must match the individual investor's actual risk tolerance and expectations.