The first rule when applying for a loan is that you need to adequately assess your own solvency so that payments over it do not become burdensome for the borrower over time. But at this stage, sometimes difficulties arise, since not everyone has an economic education in order to correctly make the necessary calculations. To facilitate the task, all possible methods for calculating annuity loan payments are collected here, which you can use to plan your own budget.
An annuity payment is ...
Before the practical part of studying the issue, you should familiarize yourself with the theory. In economic theory, annuity payment is one of the methods of monthly payment of a loan, when its amount remains unchanged throughout the entire loan term.
With this method of repaying the loan, the payer simultaneously pays accrued interest and part of the principal. But, as a rule, at the beginning the monthly installment mainly consists of interest on the loan. Therefore, when calculating annuity payments on a loan, you can notice that this method of returning funds is not very beneficial for borrowers.
Annuity Classification
Depending on additional lending conditions, annuity payments are divided into small groups. Their classification is quite diverse, but some types of annuities are no longer found or are extremely rare in the list of banking services.
Types of annuities:
- Fixed - unchanged throughout the loan term.
- Foreign exchange - the amount of payment may vary depending on fluctuations in the foreign exchange market.
- Indexable - can be adjusted adjusted for the current inflation rate.
- Variables - payments vary depending on the level of profitability of a financial instrument.
The mechanism for calculating annuity loan payments depends on their type. However, fixed annuities are most often used for consumer lending.
Advantages and disadvantages of annuity payments
Calculation of annuity payments on a loan is usually made before it is issued. Therefore, it is important to know whether it is worth doing any calculations at all, or whether it is better to immediately choose another bank for a loan. To decide, you need to weigh all the pros and cons of annuity payments.
Benefits:
- invariability of the amount and date of payment throughout the loan term;
- accessibility for almost all borrowers, regardless of their financial situation;
- the possibility of reducing payments adjusted for inflation.
For many people, the annuity method of repaying a loan is convenient because, knowing the exact amount of the monthly installment, it is easier to plan a family budget. However, in terms of economic benefits, it has several significant drawbacks.
Disadvantages:
- the total amount of overpayment is much higher than with a differentiated method of repaying debt;
- complexity of early repayment;
- the impossibility of recalculation if the borrower wishes to repay the loan ahead of schedule.
If we consider an example of calculating an annuity payment on a loan, then it immediately becomes clear that it is beneficial for banks to issue such loans to customers. However, some are not so keen on profit, therefore, provide borrowers with more favorable credit conditions. It is worth noting that there are no such companies among microfinance organizations . Therefore, when applying for a loan, an annuity method of paying off debt is always used.
What does a loan payment consist of?
If we consider the components of an annuity payment, we can see that it is divided into two parts. The first is fixed interest on the loan, the second is part of the amount of the principal debt. Moreover, the amount of accrued interest usually exceeds the amount used to repay the loan.
The loan body is compared with interest on it only in the middle of the total loan term. Further, the amount that is used to pay off the main debt begins to grow, gradually exceeding the amount of payments for using the loan. As mentioned earlier, this is not beneficial for borrowers, especially when it comes to long-term lending.
Methods for calculating the monthly annuity loan payment
In fact, calculating the exact size of the payment is quite simple. Moreover, this can be done in several ways at once. Using at least one of them, you can navigate the upcoming payments and evaluate how “uplifting” a bank loan will be.
Methods for calculating an annuity payment:
- manually using a formula;
- Using Microsoft Excel
- on the bank’s website using a loan calculator.
Each of the calculation methods, if applied correctly, will give an exact figure equal to the upcoming payment size. Therefore, if there is doubt about the correctness of the calculations already made, you can check by calculating the annuity payment in another possible way.
Calculation formula
The calculation of interest on loans for annuity payments, regardless of the chosen method of calculation, is carried out using a special formula. Credit calculators, mobile applications and other software makes the right calculations, starting from it.
The general form of this formula is as follows:
AP = O * ps / 1 - (1 + ps) -s ,
Where:
AP - monthly annuity payment;
About - the amount of the main debt;
ps - monthly interest rate of the bank;
s - the number of months in the loan term.
Knowing the formula, you can easily make the necessary calculations yourself. It is enough to substitute the initial data of the proposed loan instead of letters, and make the necessary mathematical calculations using a conventional calculator. But in order to make the calculation of loan repayment by annuity payments the most understandable, consider it as an example.
Calculation Example
Suppose that the borrower took a loan in the bank in the amount of 50,000 rubles for a period of 5 years. Under the terms of the loan agreement, the annual interest rate on the loan is 20%.
Based on the formula, for calculations you need to know the monthly interest rate. Banks rarely indicate this figure in a loan agreement, so you need to find it yourself. To do this, use the formula:
ps = P / 100/12,
Where:
P - annual interest rate.
Payment:
ps = 20/100/12 = 0.017.
Knowing all the initial data, you can begin to find an annuity payment on the loan. It looks like this:
AP = 50,000 * 0.017 / 1 - (1 + 0.017) -60 = 1336.47 rubles.
Calculation of annuity loan payments in Excel
Excel is not just a big table. In it you can make a huge amount of calculations, knowing only which formulas to use. To calculate the annuity payment in Excel there is a special function - PMT. To use it correctly, you need to follow the following steps:
- Fill in the source data (amount, interest and loan term in cells B2, B3, B4, respectively).
- Set up a loan repayment schedule by month (A7 -A n ).
- Make the column “Credit Payments” (B7 - B n ).
- Opposite the first month, in the column “Loan payments” enter the formula
= PMT ($ B3 / 12; $ B $ 4; $ B $ 2) and press Enter.
The result of the calculations is displayed in the table in red with a “-" sign. This is normal, because the borrower will give this money to the bank, and not receive it. The formula for calculating a loan by annuity payments in Excel allows you to make calculations so that the values are positive. With its help, bank employees can make and print a payment schedule for borrowers in a matter of minutes, saving their time.
To fill in all the months, you need to stretch the cell with the formula to the end of the repayment schedule. But since the annuity payment does not change over time, the numbers in the cells will be the same.
You can double-check the data with the help of a credit calculator for annuity payments. It is on the websites of all banks that issue loans with this repayment method. To use the loan calculator, you will need the same initial data as for the previous calculation methods. They must be entered in the fields provided for filling. And then the program will do all the calculations on its own within a few seconds, giving the potential borrower the opportunity to evaluate the amount received and think carefully about the upcoming loan.