Nowadays, few have dealt with obtaining bank loans, whether it be a mortgage, a loan to buy a car, or just a sum of money for certain needs. But is it always when you conclude an agreement with the bank that everyone carefully familiarizes themselves with the conditions? Typically, the borrower is interested in the approved amount, the rate at which the loan is issued, the amount of the monthly payment, the possibility of early repayment. Does the future borrower always think about the methods of calculating the monthly fee offered by the bank? Is annuity or differential payment more profitable? Indeed, sometimes banks allow you to choose this option.
Popular annuity
Most often you have to deal with annuity payments. It is not surprising, because it is this method that is most interesting to the bank. Of course, when granting a loan, no one will tell the future borrower what will be beneficial for him and, conversely, disadvantageous to the lender. It is clear that the provision of money on credit is primarily a financial transaction that allows one side to get the desired amount without long-term expectation and accumulation, and the other to profit, make a profit.
And, of course, if there is an opportunity to increase profit, no one will lose it. Most often, the loan agreement initially indicates the method of repayment: annuity payments. A differentiated payment is not even offered to the borrower.
What are annuity payments?
Annuity payments seem more attractive due to convenience. Of course, not every one applying to a bank for a loan delves into all banking and other financial terms and concepts. It’s far more comfortable to listen to the consultant’s explanations, stated in a simple and understandable language that you can get the required amount of money at a time, and then extinguish it for a certain period agreed upon earlier by the amounts indicated in the appendix to the contract. So they are annuity payments.
These are equal amounts that are paid monthly. It’s so convenient to find out if the monthly income allows you to pay off exactly this amount until the debt is finally closed. But what makes up such "equal amounts"? And they are designed so that in the first months of debt repayment, the borrower pays large amounts of bank interest and very small amounts of the main debt.
What are differentiated payments?
On the contrary, this is an absolutely incomprehensible amount, which is large at the initial stage of loan repayment and decreases as it decreases. But this is only at first glance. Next, we will analyze the calculation of differentiated payment in more detail. And everything will finally fall into place.
Differentiated payments - this is a way of paying off debt, in which the debt on the loan is reduced evenly from month to month, and interest is calculated monthly on the balance. It turns out that with this method, everything is "more transparent", but more complicated.
What are the advantages?
From the above it follows that if we consider the annuity and differentiable payment, the difference is that the first is simpler and more convenient, and the second is “more honest” in relation to the borrower. Pay interest on the balance of the loan - this seems more correct.
Just knowing what differentiated payments are and seeing the repayment schedule, you can immediately understand that this is a great way to gradually reduce the "credit burden". Of course, this is not so noticeable with small and short-term loans. But, for example, with a mortgage loan lasting tens of years, this can be a very big plus. Having borrowed a large amount during your life, when it is possible to earn big money and pay off a loan, you will have to give it back for a very long time. And there is no certainty that the financial crisis or any other circumstances will make it possible to earn the same amount.
But that is not all. A careful review and calculation of payments by both of these methods reveals that the second is also more economical than the first. Indeed, in the first method, bank interest is calculated at the very beginning of the loan repayment process, that is, for the entire amount of the debt, and in the second case, they are monthly reduced.
How to calculate?
If you understand what differentiated payments are, it is not at all difficult to deal with its calculation. The payment consists of two digits - the amount of payment for the main payment and the amount of interest paid. What do you need to know for this?
At the first stage, the amount of debt and the number of months during which the loan will be paid are sufficient. Both of these figures need to be specified in the loan agreement. Divide the amount by months, we get the number by which the loan will be reduced monthly. It does not change and is constant throughout the repayment period.
How are interest calculated?
The second part of the calculation of the monthly payment is the better the differentiated payment - the amount of interest paid to the bank. As mentioned above, it is charged on the balance of the debt, i.e., decreases every month, due to which the monthly payment as a whole also decreases. In order to calculate this indicator, it is necessary to multiply the remaining debt by the annual interest rate indicated in the loan agreement and divide by 12 months.
How to find out how much debt is for a particular month? It’s also easy. Subtract the amount of the main payment multiplied by the number of past months from the original loan amount.
Calculation on the example of a small amount
As you can see, everything is clearer than it might seem at first glance. Consider an example of such a calculation. Suppose you needed to take from the bank an amount equal to 100 thousand rubles for a short period of 3 months. The bank gave you this amount at 20% per annum.
- First, we calculate the main payment. As described above, for this 100,000 is divided by three. We receive 33,333.33 rubles - this is the amount by which monthly debt to the bank will decrease.
- The second item is the calculation of monthly interest paid. There will be three payments, which means that the sum of interest will also be three. Next, you need to add them with the figure from the first paragraph, so that we know the monthly payment for each month.
First month:
- Balance of debt - total amount of debt.
- Interest = 100,000 x 0.20 / 12 = 1,666.67 rubles.
- First month payment = 33,333.33 + 1,666.67 = 35,000.00 rubles.
Second month:
- Balance of debt = 100,000 - 33,333.33 = 66,666.67 rubles.
- Interest = 66,666.67 x 0.20 / 12 = 1,111.11 rubles.
- Second month payment = 33,333.33 + 1,111.11 = 34,444.44 rubles.
Third month:
- Balance of debt = 100,000 - 33,333.33 x 2 = 33,333.34 rubles.
- Interest = 33,333.34 x 0.20 / 12 = 555.56 rubles.
- Last payment = 33,333.33 + 555.56 = 33,888.89 rubles.
In total, three payments totaling 103,333.33 rubles will be made on the loan. The loan overpayment will amount to 3,333.33 rubles.
Mortgage loan example
A differentiated mortgage payment is what really makes sense. In the above example, the overpayment on a loan is not so great. But when paying a debt equal to several million, the difference in the payment of interest of several hundred thousand rubles may be an important reason in favor of this type of payment. Consider an example of such a loan. Of course, we will not begin to schedule monthly payments - this makes no sense, because it is already clear what differentiated payments are.
For example, take a loan equal to 3,000,000 (three million) rubles. We omit the details of the other terms of the contract, such as the down payment on the mortgage and the approved amount. The loan amount - 3,000,000 - was received at 10% per annum for a period of 120 months (10 years):
- For such a loan, the amount of the principal payment will be 25,000 rubles, that is, each month the amount of debt will be reduced by this amount.
- The first, the largest payment, will amount to 50,000 rubles (25,000 principal debt + 25,000 percent of the loan)
- The twelfth payment, i.e., payment after payments during the year with a constant decrease in interest - 47,708.33 rubles. Already less than more than 2,000.
- After 5 years or 60 months, the payment will be 37,708.33 rubles.
- In the next five years, interest will be reduced to a minimum and in the last payment they will amount to 208.33 rubles. The amount of the smallest, last, loan payment is 25,208.33 rubles.
- The total cost of the mortgage will be 4 512 500 rubles, overpayment - 1 512 500 rubles.
For comparison: under exactly the same conditions, but with annuity payments, the amount of the monthly payment will be about 39,000 rubles for all 10 years, and the overpayment on the loan will be even more by 160 thousand rubles.
Conclusion
Now, knowing what differentiated payments are, you can choose what is more important for you when obtaining a loan: savings or convenience, transparency of settlements or simplicity. Which is better: to pay the amount not burdensome on a monthly basis during the entire loan repayment period or just “tighten the belt” at the first payments, but with a sigh of relief in the future? You can think over all this, having undertaken the obligation to repay the loan, owning the necessary information. And this is much more correct than agreeing to any conditions of the bank, not realizing that you have a choice.
When making a decision, it is worth considering that when choosing differentiated payments, you risk the maximum approved loan amount. After all, banks set this figure depending on your salary and your ability to pay. The monthly payment cannot exceed a certain level, which each lender sets at his discretion, usually 40-60% of your income. For example, if you plan to pay 40 thousand rubles a month, even if then the payment will decrease due to the fact that you have chosen a differentiated payment, banks may require a certificate from you that you receive at least 100 thousand rubles.