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Every borrower needs to know that there are two ways to pay the loan contracted from a bank: by the descending rate method or the median of the equal rates. Even if both refunds are fair and legal, there are many aspects that differentiate them and which constitute advantages for debtors according to their profile and objectives, but also to the ability to repay money.
Thus, it is advisable that the decision regarding the choice of the optimal reimbursement option should relate to a detailed analysis of the advantages and disadvantages of each way of repaying the borrowed money.
The most important aspect to be taken into consideration is that the two methods of payment of a loan are compiled on two debtors’ profiles, differentiated, first of all, from the income earned in direct correlation with the amount of the desired loan. For example, a client with a lower salary will not be able to access a very large amount if he chooses to repay the money in descending rates.
The word from the elderly “can not be with the lips and the bacon” is very well applied in the case of the way of repayment of the loan, since a debtor can not “enjoy” at the same time the advantages of the two variants – equal rates or decreasing rates, but will only have to satisfy the privileges generated by one of the financing payment models.
How to calculate credit repayment in equal installments
In this situation, the bank will include only a small share of the principal (the borrowed money) in the monthly installment, during the first part of the repayment period, the dominant difference being represented in this way by costs (interest plus commission charged to the principal remaining to be surrendered). As time passes, the proportion of the principal in the total value of the rate will increase, reversing the ratio in the component parts of the tranche (see photo below). In the case of equal rates, the debt to the bank (the money actually received) goes down at a slow pace.
How to calculate your credit repayment in descending rates
In this situation, the principal is divided into equal installments, the monthly installment being composed of such a principal installment and the costs incurred on the money remaining to be repaid to the bank. Even if the amount of the payment is about 20% higher than the equal rates, as can be seen in the picture below, as it advances during the repayment period, the client will pay a monthly installment ever smaller. At the same time, it is worth mentioning that the debt to the bank is constantly decreasing with the same value.
Equal rates: You can access a larger loan, but the price paid will be about 15% more expensive, and early repayment becomes almost unnecessary
By way of refunding money in equal installments, the bank can finance a larger customer, as the calculation method ensures that smaller installments are applied at the beginning of the repayment period than in the case of declining rates. How ranking in the debt is done using the first credit rate, it goes without saying that if the rate is higher, the amount that can be granted will automatically be lower.
The advantage of getting more consistent credit comes with some inconvenience. First, the client will pay almost exclusively interest and commissions in the first part of the contract, the actual payment of the loan being made only after the first half of the repayment period. This is a new drawback, namely that early repayment can no longer be beneficial to the debtor.
Another disadvantage of repayment in equal installments is the cost of the loan generated by this model of calculation, as interest and commissions apply to a considerable principal, which diminishes slowly in the first half of the credit agreement. Thus, by mirroring two 50,000-euro loans for 20 years in the two payment options, we can see that the client will also pay about 10,000 euros for the same refund. For the repayment of the down payment loan, the first installment will be about 554 euro, and the last installment will be just over 210 euros, while the total amount paid at the end amounts to almost 92,000 euros. In the case of equal credit payment, the monthly installments will be approximately 430 euro, the amount repaid after 20 years being almost 102,000 euros.
The reality on the ground shows that the overwhelming majority of debtors in Romania chose to pay their debts in equal installments, mainly because of the low income level that would not allow the Romanians to access significant amounts of money if they opted for downward reimbursement . In view of this, it is clear that we can not talk about a bad policy of banks, for which loans at equal rates are indeed more profitable, but about a peculiarity of the local economy where salaries are much lower than developed countries.
Decreasing rates: you pay less per total but the monthly burden is considerably higher, making your credit less accessible
The calculation of paper shows that the repayment of a downward credit is the optimal option, given the total cost of financing and the way the loan is extinguished over time. Even if in theory things look perfect, in practice the situation is radically changing for most Romanians who can not access the money needed in this formula because of low incomes.
In order to be able to access the amount it needs in decreasing rates, it is important that the applicant is not pressured by the need to rank in debt and that in order to benefit from this freedom it is necessary to receive a considerable monthly income that will allow him the desired financing .
The closest conclusion is that every thing in life has its price: decreasing rates impose lower income customers on the amount of money borrowed, and equal rates mean somewhat higher costs. In both credit repayment options, to win something you have to give up something else.
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