A repayment loan is a form of financing in which the borrower always pays the same repayment rate over the entire term. Therefore, this loan is particularly suitable for people who place great value on planning. The term, which is almost always significantly shorter than is the case with an annuity loan, also represents a valuable advantage for the borrower. This, of course, also leads to a disadvantage, because the borrower receives a repayment in the initial period extremely high load too. The reason for this is that interest is added to the repayment installments in full at the same time. Only in the course and the permanent repayment does the interest decrease – always in relation to the annual amount of the repayment amount. Example:
Repayment or repayment loans are often used for construction and real estate financing. The advantage is that the rate contributions are getting smaller and smaller over the entire term. Installment loans are also used as personal, business, personal or bridging loans. Pay-off loans are the classic form of financing. The difference to annuity loans is that the monthly charge remains the same throughout the entire term. With the installment loan, the monthly charge is very high, especially at the beginning.
For example, if a customer chooses a loan amount of 20,000 USD with a term of five years (interest rate 10%), he has to pay a repayment amount of 4,000 USD plus 2,000 USD in interest in the first year. In the fifth year, the repayment remains the same at 4,000 USD, but due to the previous payment amounts, only interest of 400 USD is now due. So that borrowers can now decide which form of loan is now cheaper (installment or consumer loan), the conditions must be compared accordingly. What is certain, however, is that installment loans with the same term and the same interest rate are cheaper than an annuity loan.
However, the customer’s job is to find a bank that issues an installment loan on the same terms as an annuity loan. If the installment loan is charged a premium (entrepreneurial profit), then the borrower in turn runs better with an annuity loan. However, it is important in any case: The loan must also fit the borrower in addition to all of the mathematics. And not everyone is able to pay the highest installments right from the start of their financing. Most real estate financiers calculate in the construction phase with moderate monthly rates. Because one thing should not be forgotten: every borrower still needs enough liquidity for unforeseen expenses.
However, before a loan agreement for a repayment loan is concluded, the interested party should get very detailed information about the offer and provider. If there is a variable interest rate, the interested party should ensure that special repayments are also possible at any time. However, a lender does not have to agree here. Interested parties should also get an idea of the possible uses. Pay-off loans are ideal for bridging short-term payment bottlenecks. In this way, the liquid funds can be increased accordingly. Therefore, installment loans are always used for personal loans. Because the company’s aim here is to be liquid again quickly.
The advantages of a installment loan when used for mortgage lending are that the borrower pays his bank an unchanged monthly repayment rate and the interest due on it. Each repayment rate reduces the remaining debt, and the interest is reduced accordingly. As a result, the monthly installments become lower and lower over the entire term. In return, high rates have to be shouldered at the beginning of the term. Pay-off loans are therefore particularly suitable for conversions and additions to residential property, and for all high-earners also for real estate financing. If you want to be sure whether a repayment loan is cheaper than an annuity loan, you have to determine this using a loan calculation.
The disadvantage is that the prospective loan holder must assume that the bank does not offer the same conditions for both loans. In addition, the fee rates for a installment loan are higher than for an annuity loan. Accordingly, the interest rates are higher. In addition to the amount of the loan, the personal circumstances and the financial requirements should also play a decisive role for the borrower when determining the “right” loan for him. Those who are unable to raise high monthly amounts immediately at the start of the term should better switch to an annuity loan. Because whoever relies on real estate financing should always have liquidity. Because unforeseen costs accrue faster than you think.
Borrowers should always make sure that repayment or installment loans have different requirements than a classic annuity loan. However, they differ only slightly in their specific characteristics. Because while a fixed payment rate is paramount for an annuity loan, the installment loan has a fixed repayment rate. This results in linear repayment rates for the repayment loan, which remain constant every month. Even with the annuity loan, the monthly installment remains the same, but the repayment and interest rates increase or decrease within this amount. Not so with the installment loan. Here the interest rate is recalculated every month, always from the remaining repayment amount. In this way, the monthly rate to be paid is reduced.
The linear repayment rate results from dividing the total debt by the number of repayments. Example: A borrower is interested in a loan of 40,000 USD. The bank sets an interest rate of 5 percent, term 5 years. The repayment is calculated as follows:
Many banks prefer an annuity loan because banks that finance real estate in particular also aim for the highest possible interest income.