Annuity payments, what is this form of payment for loans?

Not everyone knows about such a concept as annuity payments. What is this type of payment, probably heard by many. But what impact does it have on the value of the funds borrowed from the financial and credit institution is not known to everyone. When a person takes a loan, he pays attention to the interest. People believe that the lower the rate, the more favorable the offer. This is what those people who know little about finance think. 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 that not everyone heard about it.

Types of payments for credit

The prepared borrower is aware that it is necessary to look at a section such as the type of payment. It is he who makes a big impact on the cost of the loan. There are several payment options. Differentiated and annuity payments. What it is? Let's figure it out.

Differential payments

The first kind is the most famous. These are payments at which a different monthly payment is established, which decreases with time. All debt is divided by the number of months of the loan, payments must be made in equal shares. Interest accrues on the balance, the amount of payments will be reduced monthly.

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 people are afraid of such a thing as annuity payments. What is this type of payment, it is easier to understand, understanding the calculation mechanism . Interest should be recalculated taking into account the balance of borrowed funds, they decrease, but the share of the principal increases monthly. In the beginning, interest is paid, it turns out that banks take their income in advance. If we compare these payments with differentiated ones, then we can say that the size of the annuity is less in the first months. Somewhere in the middle of the term they will roughly equal, and then the value of the former will decrease, and the sum of the second will not change.

How can I calculate annuity payments?

Banks apply for calculating specialized calculator programs. If you do not go into the subtleties of mathematics, you can note that the loan with this payment is more expensive, as the balance of the debt decreases more slowly. The longer the loan term and its value, the higher the overpayment. The method of repayment is not so important with short-term loans.

Here's how the annuity payment formula looks:

Monthly payment = KA * SK, where KA is the annuity coefficient, SK is the loan amount.

KA = (pr * (1 + pr) ⁿ ) / ((1 + pr) ^n- 1), where pr is the interest rate (monthly), n is the repayment period of the loan.

For example, if the rate is 12% per year, then pr calculation should be 12% divided by 12 months.

Cons of annuity:

- increase in the cost of credit;

- you can not count the monthly payment for early repayment;

- Sometimes they do not allow early repayment of a loan.

Pros of annuity:

Annuity payments on the loan have not only drawbacks, they have a number of advantages.

- Do not specify the amount of payment each month, most importantly, in time to pay off the debt.

- Initial payments are smaller, this allows you to take out loans to people with low incomes.

- Low monthly payments are beneficial for family budgets. Often they are chosen for a mortgage.

- Because of inflation, this type of payment does not seem so expensive.

Attentively all count and analyze when taking a loan, so that later there were no surprises!