What is annuity payments when repaying a loan?

In connection with the popularity of lending, we, ordinary citizens, who have nothing to do with banking, have become as good experts in terms of types and conditions of loans.

Banks offer different interest rates and terms, as well as various conditions: with or without a down payment, with or without a pledge of property - we all get acquainted with them carefully, making a choice in favor of one or the other banking product. But there is one point that very few people pay attention to - these are the types of payments when repaying a debt. The amount of monthly payment depends on this parameter, which is also an important factor, since it will have to be deducted from our income during the entire time of interaction with the bank.

It is worth knowing that there is a choice: annuity or differentiated payments. But are they often given the right to choose? It is not often, because the bank is more profitable than those payments, under which the borrower is forced to pay more, that is, annuity payments. We agree, without doubting, simply because we often do not understand what annuity payments are. If in the conditions of the loan offered by the bank it is indicated that there is a possibility to choose the type of payment, then it will not be superfluous to take this opportunity and reflect on what is actually more profitable and more convenient.

Annuity payments are those in which the amount of your payment for a loan will be the same throughout its maturity. With differentiated payments, the amount will be reduced monthly.

Let's figure out what annuity payments are, and why do banks usually offer them? Like any other type of payment for a loan, this consists of two parts: the principal debt and interest accrued on its balance in the amount specified in the terms of the loan agreement. So, in the composition of your first payments, the amount of debt is a very small part of the principal amount, later it increases. This suggests that the amount of debt decreases very, very slowly, and interest is charged on it. Therefore, it so often happens that the borrower, not knowing what annuity payments are, and wishing to repay the loan ahead of schedule , suddenly discovers for himself that for several months, and even years, gives the bank monthly large sums of money, and the amount of debt has decreased quite a bit . It turns out that this is beneficial to the bank and is not beneficial to the borrower at all - you pay interest as if in advance, and if you decide to repay the loan ahead of schedule, trying to save, you will not get anything - interest for using the loan has already been paid.

Plus annuity payments in their stability. With their help it is easier to plan your budget, knowing exactly what amount of money you will have to pay out monthly. That's what annuity payments are.

As is clear from the foregoing, differentiated payments are less convenient for self-calculation, but more economical. In them, part of the principal debt is evenly distributed for the entire term of the loan, and interest accrued on the balance is reduced monthly due to a decrease in the debt. The first payments can become a big load to your budget, but in the future the amount will decrease and even allow you to repay the loan ahead of time.