Pay off your Debts: repay prematurely with special repayment?

Pay off your Debts: repay prematurely with special repayment?

The repayment loan is a not very common form of loan repayment. Nevertheless, the word amortization is currently used in the banking industry. Because no matter what repayment form it is, a loan is always paid. Repayment corresponds here to the settlement of the loan amount.

All facts about the guide “Credit eradicate” at a glance:

  • Each loan is repaid, either in regular, rising or final repayment installments.
  • An annuity loan is composed of falling interest rates and rising redemption payments.
  • A repayment loan consists of constant repayment installments and falling interest rates.

Loan repayment

1. What is a repayment?

If you take out a loan (see also: bank loans ), you have various options for financing. One is the repayment in the form of a repayment loan.

When repaying a fixed monthly amount to be paid is determined. The installment consists of the interest amount to be paid and a pro rata repayment of the repayment loan. In common usage, this is called “to pay off your debts” because the repayment is done piece by piece.

Interest can be thought of as the price to be paid to borrow the money. When costume or bike rental one speaks of rental fees, in the finance of interest (see loan interest ). To calculate the amount of the repayment installments, the loan amount is divided by the number of months, excluding interest amounts. Logically, the quotient can only be calculated if the runtime has been set in advance. This is a mandatory condition of a repayment contract.

Combination agreements in which the interest is tied only up to a certain point in time – before maturity – or loan agreements with variable interest rates are not affected in the amount of the repayment installments. The interest payments, regardless of the amount of the interest rate, always refer to the amount of outstanding credit.

In the simplest case, it is assumed that the interest is fixed until the end of the term. As time passes, the outstanding amount of credit decreases with each payment. Accordingly, the amounts of interest to be paid fall. As a result, the monthly rate decreases, since the eradication was set in advance.

The repayment is the fixed monthly amount by which the loan amount is repaid. The amount results from the loan amount and the fixed term.

2. An example calculation

If, in a simple example, one assumes that the borrower could borrow up to 300,000 euros and secure a fixed interest rate of 4.2 percent. He wants to pay off this amount within 25 years.

In order not to lose clarity, the following example shows the repayments to be paid annually for the first and last three years.

year remaining debt interest repayment Annual rate
1. 300000 12,600 12,000 24,600
Second 288000 12096 12,000 24096
Third 276000 11592 12,000 23592
23rd 36,000 1512 12,000 13512
24th 24,000 1008 12,000 13008
25th 12,000 504 12,000 12504

This calculation example illustrates the relationships between interest rates, fixed repayments and the annual rate. In most cases, loan repayments and interest are paid off together. For term loans, only monthly interest payments are made. A repayment is not necessary and the money must be saved up to the end of the term in own responsibility. In the case of microcredit or microcredit, payment of the loan amount and interest payments will only be made at maturity. A special case are the interest-free loans of some specialist suppliers in the electrical and car trade. Here only monthly repayment installments are due, without having to make an interest payment.

3. The connection between repayment, interest and annuities

Annuity is defined as a recurring and constant payment amount within a certain period of time. This results in an annuity loan monthly fixed installment payments. Here, too, the amount of the interest rate changes from rate to rate depending on the outstanding loan amount, but at the same time the repayment amount increases.

For the sake of completeness, the formula for calculating the annuities to be paid is shown below in words:

Of course, annuity loans have the advantage of constant installment payments that you can get used to. With repayment loans, the burden at the beginning is often enormous, but it decreases over time, and often with increasing salary.

Annuity loans are common in practice. This concerns both the installment payments for larger electrical appliances, as well as installment credit or consumer credit. Whenever constant rates are agreed, these are annuities. The annuity includes the repayment installment and the interest payable.

4. The conclusion: The interest amounts decrease with same repayment amounts

A repayment loan has the decisive advantage that the rates can be reduced over time and capital can be used differently. Especially with repayment loans, however, it is very difficult to come out of closed contracts early or shorten the term by special repayment.

This also seems logical when looking at a comparison of how much interest is lost to the lender through additional payments.

remaining debt Interest at 10% repayment rate
1000 100 100 200
900 90 100 190
800 80 100 180
700 70 500 !!! Special repayment !!! 570
200 20 100 120
100 10 100 110
TOTAL 370 1000 1370

For the contractually agreed repayment, the sum of the interest amounts would have been 550 euros. There is a difference of 180 euros.

This is the reason why many financial service providers deny special repayments on repayment loans, or at least only tolerate the payment of a fee. 

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