Installment loan: Declining installment amount with increasing term.
A repayment loan is also known as a repayment loan. A repayment loan is often used for real estate and construction finance. In the case of a repayment loan, the borrower always pays constant repayment installments.
The borrower can thus plan his payment optimally.
The term of a repayment loan is usually shorter than that of an annuity loan.
- usually cheaper than annuity loans with the same term and the same interest rate (mathematically the cheapest form of loan)
- low interest repayments overall.
- A loan of USD 120,000 is sufficient with a five percent interest rate and a repayment of USD 8,000. The first year, 14,000 USD are to be transferred to the bank, last year only 8,400 USD.
The disadvantages of the repayment loan
Repayment loans also have disadvantages. The borrowers have to expect very high repayment rates at the beginning. Some borrowers will not be able to afford this high burden.
- A payout loan is often not offered at all by the banks because the lenders have much less income than with other forms of loan due to the lower interest rates.
Capital was repaid by the borrower. The repayment share remains the same. As a result, the monthly rates decrease over time. The following example of a repayment loan illustrates this.
|year||Debt due at the beginning of the year||Redemption||interest||Debt due at the end of the year|
|1||$ 100,000||$ 20,000||$ 10,000||$ 80,000|
|2nd||$ 80,000||$ 20,000||$ 8,000||$ 60,000|
|3rd||$ 60,000||$ 20,000||$ 6,000||$ 40,000|
|4th||$ 40,000||$ 20,000||$ 4,000||$ 20,000|
|5||$ 20,000||$ 20,000||$ 2,000||$0.00|
Who are repayment loans suitable for?
Borrowers whose income is certain over the next 5 years will benefit from a repayment loan. The borrowers must of course have a reasonably high income to be able to pay the initially high installments. A repayment loan is suitable for civil servants, employees, freelancers and the self-employed.
- The payment method of the payout loan depends on both the bank and the borrower. Repayments can be made monthly, annually or quarterly.
Installment Loans or Annuity Loans – Which Is Better?
The second popular variant of the construction money is the annuity loan. Here, payments of the same amount – consisting of repayment and interest – are always transferred to the bank. For the first example, the builder pays around 5,500 USD in repayment for the annuity loan in the first year – and more than 5,800 USD in building interest.
Advantage: The annuity loan can be planned over the entire term, but has the disadvantage of a low initial repayment. Which is the better mortgage lending? This question can only be answered against the background of individual framework conditions. An annuity loan is not the best solution for everyone.
Those who can afford the high repayment will significantly reduce the debt burden from the construction money, especially in the first few years. At the same time, the burden of interest payments is significantly reduced. The annuity loan, on the other hand, accommodates the planning-conscious building owner.
Mortgage lending calculators can calculate your budget exactly and go well prepared to the consultation with the bank.