2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
Not everyone knows about such a thing as annuity payments. Many people have probably heard that this is a type of payment. But what effect it has on the cost of funds borrowed from a financial institution is not known to everyone. When a person takes out a loan, he pays attention to interest. People believe that the lower the rate, the better the offer. So think those inhabitants who know little about finance. They also pay attention to the amount of the loan and its term. These are, of course, essential features. But there is an important indicator, not everyone has heard of it.
Types of loan payments
A prepared borrower knows to look at such a section as the type of payment. It is he who has a great influence on the cost of the loan. There are several payment options. Differentiated and annuity payments. What it is? Let's find out.
Differentiated payments
The first type is the most famous. These are payments in which different monthly payments are set, which decrease over time. The entire debt is divided by the number of months of the loan, payments must be made inequal shares. Interest is charged on the balance, the amount of payments will decrease monthly.
Annuity payments
Now let's look at annuity payments - what kind of payment is this, not all bank customers understand. Outwardly, they seem simpler. What is their essence? The loan must be repaid monthly for one amount, but it is not so easy to calculate it. Many are afraid of such a thing as annuity payments. What kind of payment is it is easier to figure out by understanding the calculation mechanism. Interest must be recalculated taking into account the balance of borrowed funds, they decrease, but the share of the main one grows every month. First, interest is paid, it turns out that banks take income in advance. If we compare these payments with differentiated ones, then we can say that the size of the annuity is smaller in the first months. Somewhere in the middle of the term, they will approximately equalize, and then the value of the first will decrease, and the amount of the second will not change.
How can annuity payments be calculated
Banks use specialized calculator programs to calculate. If you do not go into the subtleties of mathematics, it can be noted that a loan with such payment turns out to be more expensive, since the balance of the debt decreases more slowly. The longer the loan term and its size, the higher the overpayment. The method of repayment is not so important for short-term loans.
This is how the annuity payment formula looks like:
Monthly payment=KASK, where KA is the annuity ratio, SK is the loan amount.
KA=(pr(1+pr))/((1+pr) -1) where pr is the interest rate (monthly), n – loan repayment periods.
For example, if the rate is 12% per year, then to calculate pr you need to divide 12% by 12 months.
Cons of annuity:
- rising cost of credit;
- can't recalculate monthly payment for early repayment;
- sometimes they are not allowed to repay the loan ahead of schedule.
Annuity Benefits:
Annuity loan payments have not only disadvantages, they have a number of advantages.
- No need to specify the amount of payment every month, the main thing is to pay off the debt on time.
- The initial payments are lower, this allows people with low incomes to take a loan.
- Low monthly payments are beneficial for family budgets. Often they are chosen for a mortgage.
- Due to inflation, this type of payment does not seem so expensive.
Carefully calculate and analyze everything when taking a loan, so that there are no surprises later!
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