Interest payments. Fixed interest payment. Monthly loan payment

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

When it becomes necessary to apply for a loan, the first thing the consumer pays attention to is the loan rate or, more simply, the percentage. And here we often find ourselves faced with a difficult choice, because banks often offer not only different interest rates, but also a different repayment method.

Rates and payments - what they are

There are several types and forms of lending rates that differ significantly from each other. It can be quite difficult for a person who is not privy to the intricacies of the work of financial organizations to understand this issue. Nevertheless, it is not so difficult to independently calculate the loan payment and the overpayment amount and choose the most appropriate repayment option. Of course, many banks offer to use the help of a loan calculator, but it is much more interesting to study the issue on your own.

For starters, you should know that interest rates are fixed and variable. First option initiallyis prescribed in the contract and does not change until the end of its validity period, and the second involves a periodic change in the interest rate depending on various factors.

It is quite difficult to calculate interest payments of a variable type on your own, since it is necessary to take into account too many factors, so let's dwell on constant percentages in more detail.

Annuity

This is the name of monthly installments of the same amount under a loan agreement. This is one of the most popular loan repayment methods today - for many borrowers it is convenient to make monthly payments of the same size. This allows you to clearly plan the family budget, taking into account the payment of the loan.

Annuity-type interest payments include two components:

• the amount received to pay the interest itself;
• funds used to repay the body of the loan.

After some time, the ratio of these components gradually changes - the interest component decreases, and the amount allocated to repay the principal debt increases. The total payment amount remains the same.

Thus, annuity payments cause a slightly larger total overpayment. This is because at first the amount of the principal debt is reduced slightly, and interest is charged on the outstanding balance. Therefore, the main share of interest is paid first. And only then does the main repayment of the body of the loan take place,which is especially noticeable when trying to repay early.

Calculation example

Let's, for example, calculate the monthly interest payments on a loan in the amount of 600 thousand rubles for 3 years at 24% per annum.

First you need to calculate the interest rate on the loan per month (P), for which we divide the annual interest rate by the number of months in a year (of course, we divide the result by 100, because this is a percentage):

P=24: 12: 100=0.02%

Now let's calculate the annuity ratio (A):

A=P x (1+P)N: ((1+P)N-1)

P - rate % per month (in hundredths).

N - number of repayment periods (for how many months the loan was taken).

A=0.02 x (1 + 0.02)36: ((1+0.02)36 - 1)=0.02056

Next, we need the formula for calculating the annuity payment:

M=K x A

K - total loan amount.

A - annuity ratio.

M=600,000 x 0, 02056=12,336 rubles

Thus, if you want to take a loan on the proposed terms, then you will have to pay 12 thousand 336 rubles for 36 months

Early repayment

Despite the fact that the loan payment schedule in this case is stable and accurately predictable, many customers may want to fulfill their obligations as quickly as possible. It would seem that banking institutions should welcome the premature repayment of debt, because in this way the risk of default is significantly reduced, but in practice this is far from the case. Early loan repaymentthe bank loses part of the interest due to it, therefore, not every loan agreement provides for such an opportunity, so this point should be discussed even before the conclusion of the agreement.

To change the schedule of annuity payments, you need to notify the employee of the credit institution and make a sum of money in excess of the usual payment. Based on this, a bank employee will draw up a new schedule for you, and it should be taken into account that the calculation will be performed in such a way that the fixed interest payment will decrease, and their number will remain unchanged.

Benefits of annuity payment

Some may have the opinion that the annuity repayment of the payment is absolutely not profitable, meanwhile, in some situations it may turn out to be much better than the differential one. Especially when you have to pay interest on a mortgage - payments are quite long in time and considerable in amount. The advantages in this case are obvious:

• you can apply for a loan even with a low income;
• small amounts of payment to reduce the burden on the family budget;
• Over time, the high cost of borrowing is felt less as the laws of inflation take effect.

Differentiated payment

No less popular in Russia is a loan repayment scheme in which interest payments are gradually reduced by the end of the loan term. Such a system is called differentiated and also consists of two parts:

• fixed - the amount used to repay the main loan;
• decreasing - interest on the loan accrued on the outstanding balance;

As a result of the fact that the amount of debt is repaid in the first place, it is constantly decreasing, which means that the accrued interest also decreases. Thus, your monthly loan payment will no longer be a fixed amount, but will decrease from payment to payment.

It is worth knowing that if you choose a loan agreement with differentiated payments, the loan rate will be significantly higher, which means that you will have to confirm a monthly income sufficient to repay the loan.

Let's count

Let's take a moment to calculate the differentiated interest payments. The formula for calculating them is quite simple.

P=K/N

P - payment.

K - loan amount.

N – number of months.

And to calculate the percentage, use the formula:

%=O x G%/12

% – amount of interest.

O - balance outstanding.

Y% - annual interest rate.

To get the final amount of the payment, add everything together. Thus, by repeating these calculations the required number of times, you can independently draw up a debt repayment schedule.

How not to make a mistake in choosing

Before you finally decide which bank to choose to conclude a loan agreement, you should still clarify the following aspects for yourself:

1. Soberly evaluateyour monthly income. When applying for a loan with a differentiated repayment system, the bank will evaluate your income, correlating it with the amount of the first payment, and in this case it is the largest.
2. Think in advance of the possibility of early repayment - with annuity accrual of payments, this makes sense only at the beginning of the repayment period, towards the end, the interest will already be paid and it will not be possible to reduce the total amount of the overpayment. So if you plan to repay the loan ahead of schedule, it is better to apply for a loan with a differentiated repayment method.
3. Enjoy the convenience of redemption. With consumer credit for household needs, you will probably want to quickly say goodbye to debt, but differentiated mortgage interest can be unaffordable.

Conclusion

So, let's recap. A differentiated refund method should be chosen by those who:

• takes out a loan for a long time and plans to take a large amount;
• has doubts about a long-term stable financial position, however, at the time of applying for a loan, he is quite confident in his abilities;
• wants to minimize the amount of overpayment on the loan;
• plans to pay off the debt as soon as possible.

Fixed interest payment is the best choice for:

• borrowers who are not able to make large amounts of money at first;
• clients whose average monthly income does not allow making first installments for obtaining a loan with a differentiated schedule;
• people who borrowed little and not for long;
• clients seeking to plan a budget, counting on a fixed amount of payment on the loan.

As soon as the bank offers you a choice, carefully study both options, soberly assess your options. Ask the bank staff to clearly explain to you how future payments will be calculated. You can also print both options and carefully study them in a relaxed home environment, weigh the pros and cons. Then you can be sure of your financial well-being.