Loan repayment methods: types, definition, loan repayment methods and loan payment calculations

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Making a loan in a bank is documented - drawing up an agreement. It indicates the loan amount, the period during which the debt must be repaid, as well as the payment schedule.

Methods of loan repayment are not specified in the contract. Therefore, the client can choose the most convenient option for himself, but without violating the terms of the agreement with the bank. In addition, a financial institution can offer its customers various ways to issue and repay a loan.

Types of debts

A few words should be said about them. The bank allows the client to personally select the method of repaying a bank loan on convenient terms.

Repayment of borrowed funds can be carried out:

1. In the annuity way. That is, by returning the body of the debt and interest on it in equal parts throughout the entire periodlending.
2. In a differentiated way. That is, with a gradual decrease in the amount of the loan. In this case, each subsequent payment will be less than the previous one.

Annuity payments

Choosing this option for debt repayment, the client will have to pay equal amounts every month. They will not change until the end of the contract.

If the borrower returns the money in an annuity way of repaying the loan, then the money is deposited at the same frequency - on a certain date of each month, and the payment amount is fixed and does not decrease until the end of the established period.

But the amounts only seem to be the same, the difference in their structural component, nevertheless, is. It changes throughout the year, so the first and last payment will be different.

Example of annuity payment

The client took out a mortgage loan for a period of 15 years, the amount was 3 million rubles, and the annual interest rate is 10. According to the bank's calculations, the client must repay 32,238 rubles a month. The amount will remain the same, but the structure will be different.

The main debt to the bank is called the "loan body". When the borrower makes the first payment, then about 8,000 rubles will go to repay the body of the loan, and the remaining amount falls on interest. And they don't reduce the principal debt on the loan.

For the first six months, the client makes a payment on the loan, directed to interest payments. But six months later, the money will begin to flow to pay the principal debt.

Featureis such that the customer pays the interest first. Only after some time reimburses the "loan body". Gradually, the interest payment decreases, and the principal debt increases. So there is a change in the structure of the loan, but the payment amount, at the same time, remains constant. The client is not always aware of these changes in debt. For him, as a rule, the immutability of the payment amount is important.

If a borrower has been constantly depositing money into a bank account for several years, and as a result, the amount of debt has decreased slightly, this means that all the time he repaid interest amounts, and not principal.

To quickly move on to repaying the principal debt, you can use the method of early repayment of the loan. But it is not suitable for every debtor.

At the same time, it is not necessary to completely close the contract in order to save on loan repayment. The specialists note that it is enough to make a possible amount greater than the amount of the main payment, and the subsequent recalculation will reduce the interest rate and the total payment.

It is worth depositing funds ahead of schedule as early as possible. Since, the more time has passed since the start of repayment of the loan, the less profitable early payment becomes. If such a payment is made in the first part of the debt repayment, then the interest and monthly fees can be significantly reduced. Subsequent early overpayment is not able to bring such benefits, due to the fact that a large amount of interest is returned.

Annuity payment calculation

When applying for a loanThe bank takes care of all payments. But, if the client wants to make sure that the calculation of payments is correct, he can independently perform calculations using the following formula:

X=S(P+(P/(1+P)С - 1))

Here:

X - the amount of the payment that is made every month;

P - interest (for 1 month). To find out what P is, you should divide the basic rate by the year. More precisely, for 12 months;

С – loan term.

During the calculation, to the principal debt (to the "loan body") you need to add interest for the entire period, and divide the amount by the number of years. The main thing in this type of loan is that at different times the body of the loan and interest payments will differ. This allows the bank, in any case, to benefit. Even if the client wants to repay the debt ahead of schedule, the lending party will still receive a good income.

Pros and cons of annuity payment

This method of loan repayment has a number of advantages:

1. Easy calculation of payments, you can plan in advance the cost of paying the monthly debt.
2. In case of depreciation of national currencies, the payment is reduced.
3. The amount is fixed and unchanged throughout the entire period.

But every system has its drawbacks, including this one. These include:

1. A large amount of overpayments due to interest and the duration of the contract. The longer the loan term, the more noticeable the overpayment.
2. It is difficult for the client to independently calculate the amount according to the annuity system.
3. Repay earlythe loan is profitable only in the first half of the payment period, because initially the funds returned by the borrower go to repay interest, and then to the body of the loan.

Whether this method of debt repayment is suitable for the client or not, it is up to him to decide.

Differentiated payments

This is the second way to repay the loan. The main difference between such a payment and annuity is the change in the amount of monthly installments. The longer the borrower pays the loan, the smaller the payment. But in terms of composition, they are no different: the “loan body” and interest.

The amount of the principal debt remains unchanged throughout the entire term of the contract. But interest-bearing debt is getting smaller. Due to the decrease in interest, the amount of the contribution also changes.

Example of differentiated payment

Loan conditions are the same as with the annuity method of debt repayment. Comparing the structure of the initial and last installment, you can see a big difference - there was a decrease in the amount.

In the last payment, unlike the first, there is almost no interest. The main credit burden will be at the first stages of debt repayment, then it gradually decreases. That is why a differentiated method of repaying a loan is not suitable for everyone. Not every payer has the ability to pull large initial payments.

If you compare the two methods of repaying debt with each other, you can see how much the amounts differ. Under the same initial conditions of the contract: the annuity amount of payments tothe end of the year will be 5,867,344 rubles, and differentiated - 5,262,501 rubles. Because it is the most effective way to repay interest on a loan. The difference is huge.

Calculation of differentiated payments

The calculation of this type of payment is much easier than annuity. To carry out calculations, it is necessary to add the principal amount of the debt "loan body" to the accrued interest. The loan amount is then divided by the number of months on the loan.

Example. The borrower took out a mortgage for 3 million rubles, for a period of ten years, the rate was 12 percent.

3,000,000 RUB / 120 months=25,000 rubles. The percentage will constantly change, therefore, when paying half the amount (1,500,000 rubles), the further calculation looks like this: ((1,500,00012%) / 12) / 100=15,000 rubles

Pros and cons of differentiated payment

Advantages of this loan repayment method:

1. The overpayment on the loan is significantly reduced. It does this by reducing interest throughout the loan period.
2. Easy payment calculation.
3. The amount of the payment decreases every month, which reduces the credit burden on the borrower and makes it psychologically easier to transfer debt expenses.

With obvious advantages, there are also disadvantages of such a payment scheme:

1. You can't activate auto payment, because every month there are different amounts of debt.
2. You can deposit little money and get a delay, so you always have to contact the schedule or the bank to clarify the nextpayment.
3. At first, the loan amounts are very large.

The most favorable type of loan repayment is selected from the total loan amount and repayment terms. It should be noted that the selected method cannot be changed to another during the entire period of the contract.

Cash repayment method

It is possible to pay in cash for a loan, but it is extremely inconvenient, because you need to deposit money at the cash desk. To do this, you will have to come to the branch office in person.

It is worth paying through the cashier if:

• there is little time left to make the next payment;
• client does not want to pay transfer fees;
• the borrower has no confidence in the correct self-transfer of funds.

Only individuals use the cash method, it is inconvenient and unacceptable for companies.

Cashless loan repayment method

If a person values his time, then the fastest option to make a payment is cashless payment.

Types of wire transfer:

1. Transfer from a plastic card to a bank account.
2. Repayment through accounting. When a salary is credited to an employee's card, the amount of the loan payment is automatically debited.
3. Using e-wallets and multi-cassettes.
4. Postal transfer.

It is possible to make a cashless transfer quickly, but here is the transfer of money to the accountmay take some time. Therefore, it is better to take care of this in advance.

Banks enable their customers to choose the order and methods of loan repayment. The borrower himself decides how to pay him - annuity or differentiated payment, deposit cash at the cash desk or make a cashless transfer.

In any case, before applying for a loan, the client must decide in advance on the further repayment of the debt. And if he is able to pull the initial credit burden of a larger size, it is worth choosing a repayment system with decreasing payments to save on overpayments.