Sure when you make a loan the main criterion, forcing people to make a choice in favor of a bank and the type of credit is the interest rate. It was her lenders indicate in their brochures and announce the commercials. So, coming to the bank to fill out an application for a loan, people think they already know everything they need to know: the amount, time and, of course, the interest on the loan. But the borrower is required to pay careful attention to the section in the questionnaire, where it is necessary to make a choice (to put a “tick”) and differentiate between annuity payments. As a rule, the loan officer in such situations, suggest how to answer this question, without going into details, but simply following the policy of the credit institution. But there is this paragraph is not “for show” and carries a certain benefit or to the bank or its clients. In addition, the form of payments as well as interest rate directly affects the cost of credit.
Differentiated and annuity payments
As is known, the repayment of the loan at the expense of payments, consisting of part of the principal (loan amount) and interest. But the calculated size of these payments may be different. The main difference between the annuity and differentiated contribution is to see if the amount of the monthly payment on a loan or remains constant throughout the life of the loan.
The best-known way to repay loans today are differentiated payments, the amount of which will vary each month and gradually decreasing. The main duty in this case is divided by the number of months of the loan, and is paid in equal installments. Interest will accrue on the outstanding balance due to what their sum is always smaller.
Annuity payments are apparently more simple: the repayment of the loan is carried out every month in the same amount, but it will be more difficult calculation. Interest is also converted to the loan balance and falling, but the proportion of principal changes with each delivery and increases. As a result, at the initial stage is mainly paid interest, i.e. Bank essentially just takes a revenue forward.
Compared with differentiated, the amount of the annuity payments will be lower at the beginning of maturity. Around the middle of the graph, they will be equal, but then begin to decrease the amount of the first and second amount will remain unchanged.
The calculation of annuity payments
To calculate the annuity banks use special calculator program. Therefore, without such tools at hand and without going into complex mathematical calculations and ratios, you can simply point out that the loan repayable annuity payments, will result in more than differentiated. This happens due to a slower reduction of principal balance on which interest is calculated. And the more the credit period and the size of the loan, the more overcharged a customer of the bank on the loan. But in the case of short-term loans, a significant difference in the methods of repayment does not exist, there is already just a matter of convenience to the borrower or the bank. To summarize and give greater clarity, the advantages and disadvantages of this type of payment.
Disadvantages of an annuity:
The high cost of credit due to overpayment percent.
Lack of possibility to recalculate the amount of the monthly payment in the event of early redemption.
Sometimes in the loan agreements with the annuity payments completely ruled out the possibility of early redemption.
The benefits of an annuity:
No need for a monthly payment schedule or contact the credit department of the bank for information on the amount of future payments. The borrower should take care only of compliance maturity.
Payments in the initial stages will be much less differentiated, allowing people with an income sufficient for repayment of the traditional type, to issue a loan for a large amount, without increasing the loan term. Or just the person has the ability to get a loan in a minimum amount with low income.
Relatively low monthly fee does not bear such a heavy burden on the family budget. For this reason, annuities distributed in mortgage lending, where there are long-term and significant financial resources.
The high cost of this type of payments over time can be felt less and less due to inflation and cheap money.
Today not all banks provide an opportunity to select the method of repayment. Some have a policy of rapid income security and prefer annuity payments. Others work on the differentiated scheme. And each of them will find his client. Only the client, in turn, need to avoid mistakes and seek to correct the lender, not to the one who promises a low percentage.