Differentiated loan payment: calculation formula, benefits

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

Bank loans have become so accessible and popular that now you will not surprise anyone with them. However, despite its wide popularity, few people have minimal knowledge in the field of cash loans. For example, even regular customers of banks do not always know what an annuity payment and differentiated payment are, the difference between these two terms is even less obvious. Let's fix the situation and find out what it is, let's look at the features of each method of repaying debts.

Differentiated payments

For many clients who know how to calculate their own expenses, this method of debt repayment often becomes preferable. And there are many reasons for this.

The main feature of differentiated payments is that every month their sizeis shrinking. This is due to the fact that the sum consists of two parts. The first goes to pay off the principal, and the second to pay interest on the balance. As a result, this allows the client to overpay significantly less in case of early repayment of the debt.

What is important to know?

Differentiated payments result in an increased credit burden in the first months or years. This is very important to take into account, sensibly evaluating your own capabilities. If the financial burden turns out to be unbearable for the client, he will not be able to make payments on time, there will be delays, which, under the terms of the agreement, allow the bank to impose pen alties. In addition, if you do not make payments on time, in the future this will affect the ability to get a new loan or its conditions, which may not be the most favorable.

Even if you are completely satisfied with the differentiated loan payment, this is not enough to use this payment method. The problem is that reducing costs for a potential client turns into a loss of profit for the bank itself. By lending the same amount, an organization can earn more with an annuity payment than with a differentiated one. That is why only a small number of Russian banks offer such a loan repayment system. You will have to spend a lot of time, effort and patience to find organizations with favorable conditions for you.

Annuity payment and differentiated payment: difference

If the second type of repayment of bank debtyou are already familiar with, then you should talk about the first one in more detail.

So what is an annuity payment? Keep in mind that it is also called the classic one for the reason that the vast majority of banks draw up a payment schedule for customers based on this particular method.

So, an annuity involves fixed payments throughout the loan repayment period. At first, most of the payment is made up of interest accrued for the use of funds. However, their share in the total payment is gradually decreasing, giving way to the payment of the principal debt.

This is the main difference when comparing annuity and differentiated loan repayment systems. In addition, in the first case, the overpayment is greater. This is especially noticeable in long-term lending. For example, when paying off a mortgage.

Annuity payment can be beneficial to the client if the loan is issued for a period of less than five years.

Calculation formula

Those potential customers who are interested in a differentiated payment on a loan will find it useful to know how to calculate the amount of monthly payments. This will allow, even before contacting the bank, to assess the approximate level of the debt burden and assess the feasibility of such a method of repaying the loan.

So, the differential payment formula is incredibly simple. It includes only a few components. That is why a potential client can independently use it andcalculate at least approximately your own credit burden.

Payment=Interest + Fixed part.

Let's take a closer look at each component to learn how to use it correctly.

How to use the formula?

To know the amount of payment, you need to know two components.

• The fixed part is the amount of the loan without interest.
• Interest is the amount accrued for the use of funds. It depends on the rate set by the bank, the loan period and the loan amount.

Unlike the fixed part, the exact amount of interest cannot be found out immediately. They are recalculated monthly depending on the remaining amount of the debt. Differentiated payments are gradually being reduced precisely by reducing the percentage. That is why for each month it has to be calculated using a separate formula.

Interest=(RateBalance) / 100%

This means that in the first month you can pay the bank a conditional thousand rubles in the form of interest, and by the time the loan is repaid, their amount will already be 500 conditional rubles or even less, which can be two or more times less than the initially accrued percent. This is a very important nuance for everyone who performs the calculation of the differentiated payment.

Reliability

As a rule, the exact amount of payments becomes known to a potential client only when applying for a loan directly at the bank. This is due to the fact that in advance it is almost impossiblefind out the exact interest rate that will be offered to you. In addition, banks often add payment for an insurance policy or other additional costs to the principal amount.

For the same reason, you should not fully rely on the information that can be obtained using a loan calculator posted on the website of a credit institution. In addition, banks with differentiated payments rarely operate. As noted above, the annuity payment scheme is much more profitable for them.

Benefits

• Reducing overpayments. This is the most important and at the same time the most significant advantage that a differentiated debt repayment scheme provides. The payment is calculated quite simply, so the client can fully control his own debt, not allowing the bank to act with him in bad faith. Already from the first month, the main efforts are directed to the payment of the principal debt, which ultimately allows to reduce it at a noticeable pace. And along with the debt, the amount of interest accrued monthly is also reduced.
• Long-term lending. A differentiated payment is especially beneficial for the category of potential customers that will repay the loan over a long period of time. For example, for 10 years or even more. In this case, the difference in overpayment will be especially noticeable. The overpayment will be significantly less than with the annuity method of repaying loans favored by banks.
• Reducing payments. Each month, the amount to be paid intothe loan repayment account will decrease. If initially, when drawing up your own budget, you focus on the maximum amount of payments, reducing the loan burden will allow you to repay the loan sooner or simply become a pleasant surprise, allowing you to have more free funds at your disposal.

Is everything so perfect?

However, differentiated payment is not so perfect. For example, if a client is set to repay early, regardless of the payment schedule, such a loan will not provide him with significant benefits. At the same time, it is much more difficult to obtain it than the annuity option familiar to most banks.