When borrowing a bank loan can be expected to have two major cost factors: namely, the loan interest rate and the loan interest rate and of course the loan repayment itself. Finally, it is not enough to refund the lender only the fees – also the loaned amount wants to be paid in full, The borrower can choose between different variants of the loan repayment. The most popular type is the so-called annuity payment.
A lender like a bank or a bank wants to earn money by lending money or lending rates. If a loan seeker receives a loan from friends or acquaintances who want to bail him out, interest or high interest rates are often waived. But the higher the loan amount, the less likely it is to find a lender who completely waives interest or money lending fees.
How does a loan repayment work?
Redemption is the repayment of debts that are reimbursed on schedule or even unscheduled. This applies to any type of monetary claim, whether it be loans, bonds or loans. Thus, the loan repayment is one of the most important conditions for loans or bonds. Since the debtor loses liquidity during the repayment phase, the amount of the repayment installments should always be based on his actual income and this should be fixed in writing in the loan agreement.
The loaned money will be refunded in monthly installments, which consist of the pro rata repayment amount and the related interest. An advantage for both sides: In this way, the financial burden of the debtor is not too strong and the creditor will after a certain time in addition to the fees and the amount owed back completely.
The lower the repayment installments, the longer the loan period (redemption phase) and the higher the interest rate. However, too high a repayment installment is to be avoided as it can turn the borrower into a debt trap, for example in the case of sudden unemployment.
Different types of credit eradication
The borrower has basically two different forms of debt repayment available. The scheduled repayment is a time-repaid repayment of the debt, the amount and maturity of which are recorded in a so-called repayment plan. Unscheduled repayments, however, are not based on an amortization schedule.
Regular repayment: Scheduled repayments, also known as regular repayments, are linked to a repayment agreement. The repayment schedule lists all future repayment amounts, including interest on loans and, if applicable, the due date. There are 3 different types of scheduled repayment:
Installment loan / installment repayment: Here the repayment is distributed over the entire credit period. The installments must be paid at fixed times. Although the amount of individual installments varies, the repayment performance remains the same. At the beginning of the repayment, therefore, very high credit installments are payable, but with each additional installment payment must be paid less interest. As a result, the amount of the installment is continuously reduced.
Annuity Loan: In annuity redemption, the amount of the installment remains the same throughout the repayment phase. In the further course, the redemption portion of the amount increases, whereas the interest portion decreases. In the beginning, the borrower pays mainly the loan costs and interest, then later the actual debt. The annuity loan is the only repayment type where the installment level remains constant. And that is why consumers prefer this form of loan repayment.
One time repayment: In this case, the entire amount of the loan must be repaid in a single payment on the due date. This has the advantage that the debtor remains unimpaired during the term in its solvency. On the other hand, it follows that the entire sum must be saved up to the beginning of the repayment together with interest and costs.
The one-off amortization is not to be confused with the bullet repayment, which is rarely found in the context of consumer credit anyway and is usually used by companies. During the term, only the interest accruing from which the installments are due must be paid. Only in the last installment is the loan amount then due in one single sum.
Irregular repayments: For unscheduled or unscheduled repayments, repayment is made without prior agreement. No one is required to repay the loan, but it shortens the original loan term and, ultimately, the costs.
Current account credit: The loan can be settled either completely or only partially at any time. A consultation with the bank is not necessary. This is a limited overdraft facility that can be used to bridge short-term financial constraints.
Disposition credit : The situation is similar with the well-known credit line. This repayment type is available to private individuals at any time, but is limited in its amount.
Special repayment: The option of a special repayment is offered by many lenders only at certain times, which are anchored in the respective loan agreement. Extra costs for this repayment variant only accrue if a certain amount is not exceeded. This maximum amount is usually 4 to 5 percent of the loan amount.
Calculate loan repayment
The repayment amount is not the same as the monthly installment. The redemption is only the sum that is deducted from the loan amount on a monthly basis. The repayment results from the monthly installment less interest.
To calculate the repayment of a loan, so the loan amount, interest amount and the number of monthly installments are needed. The best way to use a repayment calculator to create a repayment plan. In this way, you can determine how much the monthly installments are and how much time is needed for the repayment.
Create amortization plan
The repayment plan is an integral part of a loan agreement. The repayment plan can be created using the conditions defined therein, such as term, loan amount and repayment periods. The legal content of such a plan includes the type of loan, the amount of the loan, the interest rate, interest and repayment installments and repayment arrangements.
Amortization plans make the individual payment obligations transparent to the borrower. However, such a plan can only be prepared if a fixed interest rate has been agreed or the repayment plan remains limited to the list of repayment installments. As a rule, the lender creates the repayment plan, since this is a necessary part of the loan agreement.
Compare loans based on terms and repayment plan
Consumers who wish to take out a loan should generally compare different types of credit based on factors such as rate of pay, duration, interest and repayment schedule, more on this under Credit Comparison. As far as the repayment method is concerned, it should also be analyzed exactly which offer is suitable for one which is not.
Anyone who does not compare loans in advance and simply signs the first contract that is presented to him does not act optimally. Redemption and repayment plan in this context are very important factors, especially to avoid over-indebtedness because of an unrealizable eradication plan.