Annuity and differential payment of a loan: advantages and disadvantages of each type

Unfortunately, not all bank customers using various loans and installments understand the difference between an annuity and a differentiated payment on a loan. Therefore, when a person is asked to make a choice of a scheme when making a regular transaction, he relies on the opinion of a bank employee or (worse) acts at random. As a result, the borrower often simply does not understand what exactly he pays, why such a sum, from where he has arrears.

Annuity calculation scheme

If a person draws up installments in a shopping center or a supermarket for the purchase of goods (consumer credit), he is unlikely to be offered any differentiated payments . The fact is that the annuity repayment scheme allows you not even to form a schedule to the contract. Payments for the entire crediting period are calculated by a special formula in such a way that they are equal. Only the last sum can differ, both in the large and in the smaller side.

This scheme is used by banks in connection with the fact that no additional resources are required to service the annuity loan, everything happens in an automatic mode. The client knows what his payment is, and performs a monthly repayment. If we consider this scheme from the position of the borrower, then it is considered less profitable than a differentiated payment on the loan. In fact, if interest is charged on the residual amount of debt (and this is possible regardless of the schedule chosen), then it is impossible to talk about the financial benefits of this or that option. Simply with an annuity repayment of a client, the loan amount is slowed down more slowly, hence the final overpayment will be greater. On the other hand, it is much easier for the borrower to settle with the bank, clearly knowing the monthly amount of the payment. Moreover, if the agreement provides for the early fulfillment of obligations, nobody prevents him from paying more than indicated in the schedule.

The differentiated scheme

Still it is called classical. Experts in the field of lending, as a rule, recommend that customers choose it. The fact is that the calculation of differentiated payments for a loan is more simple and transparent. Each borrower, using a conventional calculator, can do it himself. In this case, it is the body of the loan that is divided into equal amounts (by the number of months of lending), and interest is charged on the remaining debt. Thus, we obtain a graph that decreases in time. The differentiated payment on the loan each next month will be different from the previous one. This is his main flaw. That is, the client, before you make money to the cashier or terminal, you must either check with your schedule, or specify the amount from the specialist.

The differentiated payment for the loan is not entirely convenient, and the fact that the first installments are significantly different. And this means that this scheme can be a borrower simply can not afford.

How to make a choice

People who do not have the time and the opportunity to go to the bank every time to clarify their payment, most likely, will approach the annuity. And if it is repaid ahead of schedule, then the overpayment will not be so high. Those borrowers who are accustomed to follow the schedule clearly undoubtedly, the classical repayment scheme will be more suitable. Of course, if they are not afraid of the first payments. So both the differentiated schedule and the annuity have their positive and negative points.