Not everyone knows about such a thing as annuity payments. Many people have probably heard that this is a form of payment . But not everyone knows what effect it has on the value of funds borrowed from a financial institution. When a person takes a loan, he pays attention to interest. People believe that the lower the bid, the better the offer. That is the opinion of those philistines who know little about finance. They also pay attention to the amount of the loan and its term. These, of course, are essential characteristics. But there is an important indicator, not everyone has heard of it.
Types of loan payments
A trained borrower is aware that you need 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 figure it out.
Differentiated payments
The first species is the most famous. These are payments in which a different monthly payment is set, which decreases with time. All debt is divided by the number of months of the loan, payments must be made in equal shares. Interest is accrued on the balance, the amount of payments monthly will decrease.
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. Many are afraid of such a concept as annuity payments. What kind of payment it is, it’s easier to figure it out, having understood the calculation mechanism . Interest should be recalculated taking into account the balance of borrowed funds, they are reduced, but the share of the main at the same time is growing monthly. In the beginning, interest is paid, it turns out that the 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 equal, and then the size of the former will decrease, and the sum of the latter will not change.
How can I calculate annuity payments?
Banks use specialized calculator programs to calculate. If you do not go into the intricacies of mathematics, it can be noted that credit with such payment is more expensive, since the balance of the debt decreases more slowly. The longer the loan term and its size, the higher the overpayment. The repayment method is not so important for loans for short periods.
Here is the annuity payment formula:
Monthly payment = KA * SK, where KA is the annuity ratio, SK is the loan amount.
KA = (pr * (1 + pr) n ) / ((1 + pr) n -1), where pr is the interest rate (monthly), n are the periods of loan repayment.
For example, if the rate is 12% per year, then to calculate pr you need to divide 12% into 12 months.
Cons of annuity:
- cost of credit;
- it is impossible to recount the monthly payment for early repayment;
- sometimes they are not allowed to repay a loan ahead of schedule.
Annuity Pros:
Annuity loan payments have not only disadvantages, they have a number of advantages.
- No need to specify the amount of payment every month, most importantly, pay off the debt on time.
- Initial payments are less, this allows you to take a loan to people with low income.
- Low monthly payments are beneficial for family budgets. Often they are chosen with a mortgage.
- Due to inflation, this type of payment does not seem so expensive.
Carefully count and analyze everything when taking a loan, so that then there are no surprises!