What is differentiated payments: definition, formula and calculation examples

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

In our time, few people have not de alt with obtaining bank loans, whether it be a mortgage, a loan to buy a car, or just a sum of money for certain needs. But is it always when concluding an agreement with a bank that everyone carefully reads the conditions? Typically, the borrower is interested in the approved amount, the rate at which the loan is issued, the amount of the monthly payment, the possibility of early repayment. Does the future borrower always think about the methods of calculating the monthly fee offered by the bank? Is an annuity or differentiated payment more profitable? After all, sometimes banks allow you to choose this option as well.

Popular annuity

Most often you have to deal with annuity payments. It is not surprising, because it is this method that the bank is most interested in. Of course, when granting a loan, no one will tell the future borrower about what will be beneficial for him and, on the contrary, disadvantageous for the lender. It is clear that the provision of money on credit -this is primarily a financial transaction that allows one side to receive the desired amount without long-term waiting and accumulation, and the other - to profit, make a profit.

And, of course, if there is an opportunity to increase profits, no one will lose it. Most often, the loan agreement initially indicates the method of repayment: annuity payments. A differentiated payment is not even offered to the borrower.

What are annuity payments?

Annuity payments seem more attractive due to convenience. Of course, not everyone who applies to a bank for a loan delves into all banking and other financial terms and concepts. It is much calmer to listen to the consultant's explanations, set out in simple and understandable language, that it is possible to receive the required amount of money at a time, and then repay it for a certain, previously agreed period of time, with the amounts indicated in the appendix to the contract. These are the annuity payments.

These are equal amounts that are paid monthly. It is so convenient to find out if the monthly income allows you to pay off this particular amount until the debt is finally closed. But what constitutes such "equal sums"? And they are scheduled in such a way that in the first months of debt repayment, the borrower pays large amounts of bank interest and very small amounts of the principal debt.

What are differentiated payments?

This, on the contrary, is a completely incomprehensible amount at first glance, a largeat the initial stage of repayment of the loan and decreasing as it decreases. But this is only at first glance. Next, we will analyze the calculation of the differentiable payment in more detail. And everything will finally fall into place.

Differentiated payments - this is a method of debt repayment, in which the loan debt decreases evenly from month to month, and interest is charged monthly on the balance. It turns out that with this method everything is "transparent", but more complicated.

What are the benefits?

From the above it follows that if we consider annuity and differentiable payment, the difference is that the first one is simpler and more convenient, and the second one is "more honest" in relation to the borrower. Pay interest on the balance of the loan - this one seems more correct.

Only after learning what differentiated payments are and seeing their repayment schedule, one can immediately understand that this is a great way to gradually reduce the "credit burden". Of course, this is not so noticeable with small and short-term loans. But, for example, with a mortgage loan lasting decades, this can be a very big plus. Having borrowed a large amount during a period of life, when it is possible to earn big money and repay a loan, you will have to pay it back for a very long time. And there is no certainty that the financial crisis or some other circumstances will allow you to earn as much.

But that's not all. With careful consideration and calculation of payments for both of these methodsit turns out that the second is also more economical than the first. Indeed, with the first method, bank interest is calculated at the very beginning of the loan repayment process, that is, for the entire amount of the debt, and in the second case, they decrease monthly.

How to calculate?

If you understand what differentiable payments are, it is not difficult to deal with its calculation. The payment consists of two figures - the amount of payment for the main payment and the amount of interest paid. What do you need to know?

At the first stage, the amount of debt and the number of months during which the loan will be repaid are sufficient. Both of these figures must be specified in the loan agreement. We divide the amount by months, we get the figure by which the loan will decrease every month. It does not change and is constant throughout the repayment period.

How is interest calculated?

The second part of the calculation of the monthly payment is the better differentiated payment - the amount of interest paid to the bank. As mentioned above, it is charged on the balance of the debt, that is, it decreases every month, due to which the monthly payment as a whole also decreases. In order to calculate this indicator, you need to multiply the balance of the debt by the annual interest rate specified in the loan agreement and divide by 12 months.

How do I find out how much I owe for a particular month? It's also easy. Subtract the principal payment multiplied by the number of months already past from the original loan amount.

Calculation on the example of a small amount

As you can see, everything is clearer than it might seem at first glance. Consider an example of such a calculation. Suppose you need to borrow from the bank an amount equal to 100 thousand rubles for a short period of time - 3 months. The bank gave you this amount at 20% per annum.

1. First, we calculate the main payment. As described above, for this we divide 100,000 by three. We get 33,333.33 rubles - this is the amount by which the debt to the bank will decrease monthly.
2. The second item is the calculation of monthly interest. There will be three payments, which means that there will also be three amounts of interest. Next, you need to add them to the number from the first paragraph, thanks to which we will find out the monthly payment for each month.

First month:

• The balance of the debt is the total amount of the debt.
• Interest=100,000 x 0.20 / 12=1,666.67 rubles.
• First month payment=33,333.33 + 1,666.67=35,000.00 rubles.

Second month:

• Balance of debt=100,000 - 33,333, 33=66,666.67 rubles.
• Interest=66,666.67 x 0.20/12=1,111.11 rubles.
• Payment of the second month=33,333, 33 + 1,111, 11=34,444, 44 rubles.

Third month:

• Balance of debt=100,000 - 33,333.33 x 2=33,333.34 rubles.
• Interest=33,333.34 x 0.20/12=555.56 rubles.
• Last payment=33,333, 33 + 555, 56=33,888.89 rubles.

In total, three payments will be made on the loan for a total of 103,333.33 rubles. Overpayment forthe loan will amount to 3,333.33 rubles.

Example of a mortgage loan

Standardized mortgage payment is what really makes sense. In the above example, the overpayment on the loan is not so great. But when paying off a debt equal to several million, the difference in interest payments of several hundred thousand rubles can be an important reason in favor of this type of payment. Consider an example of such a loan. Of course, we will not schedule payments on a monthly basis - this makes no sense, because it is already clear what differentiated payments are.

For example, let's take a loan equal to 3,000,000 (three million) rubles. Let's skip details about other terms of the contract, such as the down payment on the mortgage and the approved amount. Loan amount - 3,000,000 - received at 10% per annum for a period equal to 120 months (10 years):

1. For such a loan, the amount of the main payment will be - 25,000 rubles, i.e. every month the amount of debt will decrease by this amount.
2. The first, largest payment will be 50,000 rubles (25,000 principal + 25,000 interest on the loan)
3. The twelfth payment, i.e. payment after payments during the year with a constant decrease in interest - 47,708.33 rubles. Already less than 2,000.
4. In 5 years or 60 months, the payment will be 37,708.33 rubles.
5. In the next five years, the amount of interest will decrease to a minimum and in the last payment they will amount to 208.33 rubles. The amount of the smallest, last, loan payment is 25,208,33 rubles.
6. The total amount of mortgage expenses will be 4,512,500 rubles, the overpayment - 1,512,500 rubles.

For comparison: under exactly the same conditions, but with annuity payments, the amount of the monthly payment will be about 39,000 rubles for all 10 years, and the overpayment on the loan will be even more by 160 thousand rubles.

Conclusion

Now, knowing what differentiated payments are, you can choose what is more important for you when obtaining a loan: savings or convenience, transparency of calculations or simplicity. Which is better: to pay the amount of a non-burdensome amount monthly for the entire period of the loan repayment, or to "tighten the belt" a little at the first payments, but breathe a sigh of relief in the future? All this you can think through, having assumed the obligation to repay the loan, having the necessary information. And this is much more correct than agreeing to any conditions of the bank, not realizing that you have a choice.

When making a decision, it is worth considering that when choosing in favor of differentiated payments, you risk the maximum approved loan amount. After all, banks set this figure depending on your salary and your ability to pay. The monthly payment cannot exceed a certain bar, which each lender sets at their own discretion, usually 40-60% of your income. For example, if you plan to pay 40,000 rubles per month, even if the payment then decreases due to the fact that you have chosen a differentiated payment, banks maydemand from you a certificate stating that you receive at least 100 thousand rubles.