Those who at least once had to get a bank loan noticed that the agreement necessarily prescribed how the loan would be repaid - annuity or differentiated. Unfortunately, not everyone understands how these schemes differ and which one is more beneficial for the client.
What is differential loan payment?
This is a method of debt repayment, in which the borrower agrees to pay the principal in equal installments. In this case, interest is accrued on the remaining debt. The decrease in the total monthly payment is due to a gradual reduction in accrued interest. As a result, the first payment will be the largest, and the last will be the smallest. Redemption differentiated payments suitable for borrowers who initially have a large amount on hand. As a rule, such a scheme is offered to customers who apply for a mortgage or other long-term loans. It is much less commonly used in the field of consumer lending.
Differentiated Payment Scheme
Those who are willing to work for the future by substantially cutting current expenses over a period of time after applying for a loan can be advised to choose a differentiated loan. The first and most difficult months will fly by quite quickly, but after that a gradually decreasing monthly installment will not be such a heavy burden for the family budget. Most financial analysts strongly advise people planning to get a long-term loan to opt for a differentiated method of repaying a loan.
What does such a payment consist of?
Differentiated payment consists of two main parts: loan body and interest, monthly accrued on the outstanding balance. The amount is divided into equal parts, the amount of which depends on the loan term. So, having issued a loan in the amount of 240,000 rubles for a period of one year, a person should be prepared for the fact that he will have to give the bank 20,000 each month. And this is only the body of the loan. This amount will be unchanged throughout the loan term. An exception is made only in two cases:
- if the borrower has applied for an extension of the loan term;
- with partial early repayment of debt.
As for the monthly interest accrued, they will constantly change downward. Due to this, there is a decrease in each subsequent payment. Particularly advantageous in this case is partial prepayment. Having made once the amount significantly exceeding the required payment, the client gets the opportunity to significantly reduce the size of all subsequent payments.
How is the monthly installment calculated?
All types of differentiated payments are calculated according to the same scheme. The principle of calculation differs significantly from annuity repayment of a loan. As practice shows, the amount of the monthly payment is constantly changing downward. To calculate the differential payment, the entire amount of debt must be divided into equal parts, the number of which corresponds to the number of months prescribed in the loan agreement. After that, interest is added to each of these payments, which are accrued on the outstanding debt balance. With a decrease in the outstanding balance, the accrued interest also "melts".
Advantages and disadvantages
One of the most basic factors that encourage many borrowers to choose a differentiated payment is a gradual decrease in financial burden. This is very important, especially when it comes to obtaining a long-term loan. In this case, each month there will be a decrease in the load on the family budget.
The final overpayment will be significantly less than with another debt repayment scheme. This is because the annuity too stretches the terms of payment of the "body" of the loan. For example, a person who has issued a mortgage for a period of 20 years, after 10 years will remain owed to the banking institution about 80% of the original amount. And this is due to the fact that throughout this time he had to regularly pay accrued interest. In this case, a differentiated payment can be considered more profitable, because it provides for a proportional decrease in interest and the principal amount of the debt. Therefore, for all the same 10 years, the borrower will have time to repay half of the loan taken.
The disadvantages of such a scheme include a high financial burden on a person’s shoulders during the first months. The hardest time awaits the client at the start, when the amount of monthly payments hits the family budget, forcing people to save on the most necessary. In addition, the borrower will have to regularly check with the bank employees the amount of the next payment. Do not neglect the fact that the approved loan amount directly depends on the client’s income level. In its calculations, the bank must take into account the amount of the first and largest installment.
Which loan repayment scheme is the most profitable?
Most people who plan to get a long-term loan are interested in advance; annuity payment is more profitable or differentiated. In this case, it is necessary to build on the material capabilities of a particular borrower. So, annuity repayment makes it easier to plan a family budget. However, only those who prefer a differentiated scheme can pay off the principal amount quickly and with much lower overpayments. Therefore, if bank employees offer to choose one of these loan repayment schemes, before stopping on just one thing, you need to carefully weigh all the pros and cons of each method.
What difficulties may the borrower face?
First of all, it must be said that domestic banks rarely offer to use a differentiated scheme. This is due to a fairly low level of income, because the first “peak” payments imply a rather high solvency of the client, sufficient to service the loan. In modern practice, there are many cases where the borrower, who issued a mortgage with differentiated payments, subsequently found himself in a very difficult situation. Due to the increased risks on such loans, they are issued only by large banking institutions. In addition, banks often have to reduce the amount they agree to pay out at a given level of wages. This is due to the fact that, by law, loan payments should not exceed more than half of the borrower's income.
