Annuity loan payment

When issuing loans, banks in most cases use an annuity repayment schedule. We tell you how an annuity payment is formed, what are its advantages and how to independently calculate its amount, as well as other features of an annuity.

What is an annuity payment

Annuity is a type of loan calculation in which the total amount of debt, including the body of the debt and interest accrued for the billing period of using the loan, are divided into equal parts.  The borrower pays the same amount once a month until he fully settles with the bank (the last payment closes the balance of the debt, so it may differ slightly from the annuity payment).

At the same time, as part of the annuity payment itself, the amount of debt and accrued interest are distributed unequally. With an annuity repayment schedule, each monthly payment includes the amount of interest for the period and part of the principal debt. As payments are made, the principal debt decreases, which means that the amount of interest accrued decreases. Therefore, at the beginning of the term of the contract, the majority of the monthly payment is interest, and by the end of the term, the main debt.Differentiated and annuity payment - what is the difference There is another type of payment, which is called differentiated.

Its main difference from an annuity is that the monthly amount is different each time. It also consists of the main debt and interest on it, but, unlike an annuity, here the amount of the principal repayment is always the same. And since interest is charged on the balance of the principal debt, their amount becomes less with each payment. It turns out that the burden on the borrower is higher at the beginning of the term of the contract than towards the end of the contract: since the amount of interest decreases with a decrease in the balance of the principal debt.

In the case of an annuity, the parts of the payment are interdependent, and if more interest is paid, then the repayment of the principal debt decreases, and vice versa.

That is why an annuity payment is convenient for both the bank and the borrower: it allows you to more correctly distribute the financial burden and reduce the risk of delinquency.

To understand the difference between payments, let's do a little calculation. Let's say we take 5 million rubles in a mortgage for 10 years at a rate of 10.4%.

With an annuity schedule, the amount of the monthly payment will always be the same and will amount to 67,187.84 rubles, the total cost of the loan, excluding early repayment, will be 8,062,540.80 rubles. On the graph, the distribution of the body of debt and interest will look something like this:

If a differentiated loan repayment schedule is used , the monthly payment will be different each time. Its initial size in the first month will be 85,000.00 rubles, in the second - 84,638.89 rubles, in the third - 84,277.78 rubles, and so on. The last payment on the loan, excluding early repayments, will be 42,027.78 rubles, the total cost of the loan with such a schedule will be 7,621,666.67 rubles. The schedule of distribution of the body of debt and interest will change the form:

Pros and cons of an annuity

If you have noticed, with a differentiated schedule, the total cost of a loan is lower. It may seem that the annuity is disadvantageous due to the overpayment, but it is not.

The advantages of an annuity payment are

Forecasted financial burden. Every month you pay the same amount and you can plan your expenses. You don’t need to specify the schedule every time, it’s enough to set up, for example, auto payment to credit money to a credit account.

Opportunity to get a larger loan. When considering applications, the Bank takes into account the current solvency of the client and focuses on the maximum monthly load. With a differentiated schedule, the first payments can be very high, and in order to get a loan, all that remains is to reduce requests. The annuity is the same at all stages, and it will be easier to get a loan.

Favorable early repayment. With an annuity, when depositing any amount over the schedule, it is all directed to repay the body of the debt, which means that it automatically reduces the over payment of interest. At the same time, the borrower, in case of partial early repayment, can choose to reduce the term or adjust the amount of the monthly payment in order to ease the burden on the family budget or pay off the loan faster.