Many bank borrowers have heard that in the practice of lending such types of financial schemes are used as annuity and differential payment. What are these types of enumerations? What is the fundamental difference between the two?
Classification of loan payments
Russian banks offer their customers who apply for a loan to repay it in 2 ways - by making an annuity payment and differentiated. The difference in them is very significant. Each of them has advantages and disadvantages. Let's consider them in more detail.
What is the specificity of annuity transfers?
An annuity payment is a transfer of funds under a bank loan agreement every month in equal amounts. The structure of the corresponding tranche is presented:
- main debt;
- interest;
- commissions and additional fees (if provided for by the contract).
It can be noted that in the aspect of the structure, the difference between annuity and differentiated payments is minimal: both of them consist of the marked elements. But in the case of transfers of the first type, over time, the percentage of interest in the payment decreases and the share of the main debt increases.
It often happens that in the first few months of a loan, the borrower transfers almost completely only interest. In turn, by the time the calculations are completed, a person pays only the main debt. This is the difference between annuity and differential payment. Consider the specifics of the second in more detail.
What is the specificity of differentiated transfers?
As we noted above, if we compare annuity payment and differentiated in terms of structure, the difference between them will be minimal. However, as part of the differential payment, the borrower transfers to the bank monthly tranches in different sizes, decreasing over time.
It turns out that in the first months of payments a person carries out transactions in the maximum amount. By the time payments are completed with the bank, the borrower pays the minimum amount in favor of the financial institution. If we compare the annuity payment and the differentiated one in the aspect of interest distribution, the difference between them will be that when transferring the first type, the principal amount of the loan is reduced monthly by an equal amount, while the percentage is charged on the remaining amount. What are the benefits of the first and second type of transfers?
What is the benefit of each of the payments?
So, now we know what an annuity and differentiated payment is - that these are transfers of the same structure, but different in terms of the distribution of the main debt and interest on the term of settlements with the bank in accordance with the agreement. But which one is more profitable?
Everything depends mainly on the terms of the loan agreement. It makes sense to determine the annuity scheme in the contract with the bank if the loan duration is average, i.e. it is about 2-3 years. This recommendation is due to the fact that an annuity at a moderate interest rate assumes a relatively low and, moreover, uniform payment burden, while differentiated transfers are high in the first months of loan repayment.
In turn, for short (1-2 years) and long (5 years) loans, it makes sense to pay attention to differentiated payments.The fact is that in this case for the borrower, as a rule, it is more important to observe a real decrease in the principal loan amount.
Fundamental differences between an annuity and a differentiated scheme
So, the key fundamental difference between annuity as a type of transfer under a loan agreement from a differentiated scheme is the ability to reduce the payment burden in the first months in exchange for the active payment of interest to the bank. In turn, the second type of payment allows you to reduce the payment burden for a person at the final stage of settlements with a financial institution, but in the first months it will be quite noticeable. True, the main debt in the corresponding period decreases, as a rule, much more intensively than in the case of annuity schemes. Of course, provided that the interest rates for each of the considered types of payments will be the same.
Thus, if we consider annuity payment and differentiated from the point of view of the payment load, the difference between them will be in its higher level with the second type of transfers in the first months, but significantly lower at the final stage of settlements. At the same time, this may not be very beneficial for the borrower due to inflationary processes: overpayments in the framework of differentiated transfers in the first months may have significantly higher purchasing power than increasing the payment burden for annuity payments at the final stage of settlements with the bank. However, not all banks give their customers the choice of the optimal loan settlement scheme. Such an opportunity is often considered as an additional privilege when servicing the borrower.
How to agree with the bank on the choice of payment?
So, now we know what annuity payments and differentiated payments are, which is better for certain loan terms under contracts between borrowers and banks. But how can a person conclude a loan agreement involving certain transfers?
In this case, it all depends on the policies of the banks. Some offer the client to determine the optimal type of payment. Others agree to enter into a loan agreement, provided that the borrower agrees to pay the debt only on an annuity or differential payment.
It can be noted that in the early years of the development of the lending market in the Russian Federation among banks, the conclusion of agreements with borrowers involving differentiated payments was especially often initiated. However, now the most popular payment schemes are annuity. The terms of bank agreements, reflecting the transfer of funds to financial institutions through differentiated payments, today are quite rare.
