A loan at the bank is documented - drawing up a contract. It indicates the amount of the loan, the period during which it is necessary to repay the debt, as well as the schedule for making payments.
The loan repayment methods are not indicated in the contract. Therefore, the client can choose for himself the most convenient option, but without violating the terms of the agreement with the bank. In addition, a financial institution can offer its customers various ways of issuing and repaying a loan.
Types of debt
A few words should be said about them. The bank allows the client to personally choose the method of repaying a bank loan on convenient terms.
The return of borrowed funds may be carried out:
- Annuity way. That is, by returning the body of debt and interest on it in equal parts throughout the entire lending period.
- In a differentiated way. That is, with a gradual decrease in the loan amount. In this case, each subsequent payment will be less than the previous one.
Annuity Payments
Having chosen this option for paying off the debt, the client will have to pay equal amounts every month. They will not change until the expiration of the contract.
If the borrower returns the money in an annuity way of repaying the loan, it means that the money is paid at the same frequency on a certain date of each month, and the payment amount is fixed and does not decrease until the end of the specified period.
But the amounts only seem to be the same, there is a difference in their structural component. It changes throughout the year, so the first and last payment will vary.
Annuity Payment Example
The client issued a mortgage loan for a period of 15 years, the amount amounted to 3 million rubles, and the annual interest rate is 10. According to the bank’s calculations, the client must repay 32,238 rubles a month. The amount will remain unchanged, but the structure will be different.
The main debt to the bank is called the “loan body”. When the borrower makes the first payment, about 8,000 rubles will be used to repay the loan body, and the remaining amount falls on interest. And they do not reduce the main loan debt.
For the first six months, the client makes a payment on the loan, directed to interest payments. But after six months, the money will begin to come in payment of the main debt.
The peculiarity is that the client first repays the interest. Only after some time compensates for the "body of credit." Gradually, interest payments are reduced, and the principal debt is increased. So there is a change in the structure of the loan, but the amount of payment, however, remains constant. The client does not always know about these changes in debt. For him, as a rule, the invariance of the amount of payment is important.
If the borrower constantly deposited money into a bank account for several years, and as a result, the amount of debt decreased slightly, this means that all the time he repaid interest amounts, and not the main debt.
To quickly switch to repayment of the main debt, you can use the method of early repayment of the loan. But it does not suit every debtor.
At the same time, it is not necessary to completely close the contract in order to save on loan repayment. Experts note that it is enough to deposit a possible amount greater than the size of the main payment, and subsequent recalculation will reduce the interest rate and the total payment.
It is worth to deposit money ahead of schedule as early as possible. Since, the more time has passed since the start of loan repayment, the less profitable is the early payment. If such a payment is made in the first part of the debt repayment, then you can significantly reduce the interest payment and the monthly fee. Subsequent early overpayment is not able to bring such a benefit, due to the fact that a large amount of interest is returned.
Calculation of annuity payment
When applying for a loan, the bank takes care of all the calculations . But, if the client wants to verify the correctness of the calculation of payments, then he can independently make the calculations, according to the following formula:
X = S * (P + (P / (1 + P) C - 1))
Here:
X - the amount of payment that is paid every month;
P - interest (for 1 month). To find out what P is equal to, the basic rate should be divided by year. More precisely, for 12 months;
C - loan term.
During the calculation, interest should be added to the main debt (to the “loan body”) for the entire period, and the amount should be divided by the number of years. The main thing in this type of loan is that at different times the loan body and interest payments will differ. This allows the bank, in any case, to receive benefits. Even if the client wants to pay off the debt ahead of schedule, the lender will still receive a good income.
Pros and cons of annuity payment
This method of repaying a loan has several advantages:
- A simple calculation of payments, you can pre-plan the cost of paying a monthly debt.
- In case of depreciation of national currencies, the payment is reduced.
- The amount is fixed and constant throughout the period.
But any system has its drawbacks, including this one. These include:
- A large amount of overpayments due to interest and the duration of the contract. The longer the loan term, the more noticeable overpayment.
- It is difficult for the client to independently calculate the amount according to the annuity system.
- Repaying a loan ahead of schedule is beneficial only in the first half of the payment term, because initially the funds returned by the borrower go to pay off interest, and then to the loan body.
Whether this method of repaying the debt is suitable for the client or not, is up to him alone.
Differentiated payments
This is the second way to repay the loan. The main difference between such an annuity payment is a change in the amount of monthly contributions. The longer the borrower pays the loan, the smaller the payment. But in terms of composition, they are no different: “loan body” and interest.
The amount of the principal debt remains unchanged throughout the duration of the contract. But interest-bearing debt is getting smaller. By reducing interest, the size of the contribution also changes.
Differentiated Payment Example
Lending conditions are the same as with the annuity method of debt repayment. Comparing the structure of the initial and last installment, you can notice a big difference - the amount has decreased.
In the last payment, unlike the first, there is almost no percentage. The main credit burden will be at the first stages of debt repayment, then it gradually decreases. That is why a differentiated way of repaying a loan is not suitable for everyone. Not every payer has the ability to delay large initial payments.
If you compare the two methods of paying off debt with each other, you can see how much the amounts differ. Under the same initial conditions of the contract: the annuity amount of payments by the end of the year will amount to 5,867,344 rubles, and the differentiated one - 5,262,501 rubles. Therefore, this is the most effective way to repay interest on the loan. The difference is huge.
Differentiated Payout Calculation
The calculation of this type of payment is much easier than annuity. To carry out the calculations, it is necessary to add the principal amount of the debt “loan body” with accrued interest. The loan amount is divided by the number of months on the loan.
Example. The borrower took a mortgage of 3 million rubles for a period of ten years, the rate was 12 percent.
3 000 000 rub. / 120 months = 25 000 rub. The percentage will constantly change, so when paying half of the amount (1,500,000 rubles), further calculation looks like this: ((1,500,000 * 12%) / 12) / 100 = 15,000 rubles.
Pros and Cons of Differentiated Payment
The advantages of this method of loan repayment:
- Significantly reduced loan overpayment. This is due to a decrease in interest over the entire lending period.
- Simple calculation of payments.
- The amount of payment decreases every month, which reduces the credit burden from the borrower and helps psychologically easier to transfer debt costs.
With obvious advantages, there are also disadvantages of such a payment scheme:
- You cannot connect auto payment, because each month different amounts of debt.
- You can make a small amount of money and get late payments, so you always have to go to the schedule or to the bank to clarify the next payment.
- At first, the loan amount is very large.
The most profitable type of loan repayment is selected from the total loan amount and repayment conditions. It is worth noting that the selected method cannot be changed to another during the entire period of the contract.
Cash repayment method
You can pay in cash for a loan, but it is extremely inconvenient, because you need to deposit money to the cashier. To do this, you will have to come to the office of the branch in person.
It is worth paying through the cash register if:
- there is little time left for making the next payment;
- the client does not want to pay a transfer fee;
- the borrower does not have confidence in the correct self-crediting of funds.
Only individuals use cash, for companies this is inconvenient and unacceptable.
Cashless loan repayment method
If a person values his time, then the quickest option to make a payment is by bank transfer.
Types of wire transfer:
- Transfer from a plastic card to a bank account.
- Repayment through accounting. When a salary is credited to an employee’s card, the amount of the loan payment is automatically written off.
- The use of electronic wallets and multicash.
- Postal transfer.
It is possible to make a transfer in a non-cash way quickly, but crediting money to an account may take some time. Therefore, it is better to take care of this in advance.
Banks give their customers the opportunity to choose the procedure and methods of repaying a loan. The borrower himself decides how to pay him - an annuity or differentiated payment, to deposit cash in cash or to make a wire transfer.
In any case, before applying for a loan, the client must decide in advance on further repayment of the debt. And if he is able to pull the initial loan burden of a larger size, it is worth choosing a repayment system with decreasing payments in order to save on overpayment.