Bank loans can be divided into several categories – by price, by purpose, by type of collateral and by type of loan repayment. And this last division will be considered in more detail in this article. What does it mean that I can repay a loan with an annuity installment? How does this form of repayment differ from the interest installment? How to calculate the installment interest rate? There are only a few questions that we will look for answers to.
Capital installment (annuity) – definition
We divide a bank loan into a mortgage, mortgage, car loan, cash loan, ROR loan and credit card. You can read more about credit types, their risk and price here. The first 4 types of loans mentioned are loans from the so-called annuity installment. What does it mean? The annuity installment is a capital and interest installment. Each annuity installment will include both interest on the bank’s debt and capital that reduces our debt balance. Therefore, with each installment paid, we repay part of the money that we have to give back to the bank, thanks to which it will be able to repay our debt in full and close the loan within a specified period. The bank will of course calculate the amount of the installment depending on the repayment period we decide on. Along with the loan agreement, we will also receive a schedule that will show us how our liability balance will decrease over time. The amount of the installment can of course change over time, but this will only happen if we have a loan based on a variable interest rate and interest rates change. You can read more about it here. The schedule and amount of the installment may also change if we overpay the loan capital. In the case of overpayment, the period for which we take out the loan remains unchanged, however, our debt balance in relation to the bank changes, which means that the monthly installment will decrease.
The structure looks a little different in the case of a loan in a savings and checking account. This is characterized by the fact that the bank gives me the opportunity to exceed the amount of funds held by a certain amount. So simply put, I can choose more money from the account than the accumulated on it. It is obvious that the bank will not allow me to use this money for free – it will charge a fee based on the amount of funds used at any given time. This fee will be the interest consisting of the reference rate and the bank’s margin. The bank will not require me to repay the capital, it will only charge interest on the capital I use at the moment.
Which installment is better for the customer?
The answer to this question definitely requires an analysis of the context in which financing is taken. In terms of monthly charges, the loan with interest installment will certainly be less noticeable. However, we must realize that if we do not overpay the capital of our commitment, it may accompany us to the ‘end of life’. The loan agreement is of course temporary, usually concluded for a period of one year, but with the possibility of extension. Therefore, if we pay interest installments on time, the bank will have no problem with extending our loan for another year. A loan with an interest installment will definitely be a good solution for people who are planning to meet some greater current need, but know at the same time that they will repay the outstanding capital from the income of the next few months. However, if we expect repayment over a period of several years, it will be safer to choose a loan with an annuity installment . Looking at products through the prism of prices – revolving credit is one of the more expensive products, which results directly from the risk it carries for a banking institution. Therefore, if for some reason we care about the construction of a loan with an interest installment, we must be aware of the higher price.