Prepayment Penalty: Information on the Annuity Loan
The annuity loan is a loan from a bank at a constant rate. The amount of the payable rate therefore remains the same over the entire term. The annuity rate or annuity consists of a repayment and interest portion. At any rate, part of the remainder of the debt is paid. This reduces the interest component in favor of the redemption portion. The interest is set in the annuity loan at closing for a contracted period.
In a nutshell: information on the annuity loan for fast readers
- An annuity loan is a loan form with fixed monthly installments consisting of interest and principal.
- At the beginning, the annuity consists primarily of interest payments and only a small part of capital repayments. In the course of the fixed interest period, this ratio shifts.
- The interest rate is fixed once at the beginning and is thereafter not negotiable.
Annuity Loan as Formula: Calculate Annuity
An annuity loan can be calculated. An annuity loan is made up of several components: the annuity, the term and the repayment installments. In order to calculate these three formulas are used, which we explain below.
To calculate the annuity, ie the monthly rate, the following formula is used:
The annuity formula in words:
|Annuity = loan amount x||(1 + interest rate) Term x interest rate|
|(1 + term) runtime -1|
Alternatively: annuity = amortization portion + interest portion
For the further formula we need the following components:
|R = annuity||S O = loan amount|
|i = interest rate||n = duration in years|
|T t = repayment installments||q = interest factor|
Now we use this annuity calculator for an example. The interest rate in this example is 3%. The interest factor (q) is then 1.03. This is based on the following calculation:
|q = 1 +||p|
This must now be used in the following formula:
|Annuity = starting sum x||1.03 5 x 0.03|
|1.03 5 -1|
Calculation of the term
The term of the annuity loan can also be calculated using a formula:
|n = –||ln (1 – ix S 0 / R)|
ln stands for the logarithm Naturalis. However, this formula assumes that the interest rate remains the same throughout the term.
Annuity Loan and Amortization Schedule
An amortization calculator for the annuity loan is also available through the formula:
|T t = T 1 xq t-1|
T t means the first repayment rate. t is the number of periods.
The annuity loan: advantages and disadvantages
The annuity loan has the following advantages and disadvantages compared to other loan types.
- Fixed interest ensures planning security
A fixed interest rate annuity loan is usually between five and 15 years. Within this fixed rate, the monthly rate is always the same. This is easy to calculate, offers planning security and you always know how many euros have to be transferred to the bank.
- Remaining debt at the end of the fixed interest period is fixed
Even if you do not plan to pay back the remaining debt completely by the end of the contract, for example because you want to carry out follow-on financing or rescheduling, you can calculate this with the formula at the beginning:
|S t = S 0 x||q n – q t|
|q n – 1|
- Redemption reduces the residual debt
Since the principal payments are usually settled immediately, this ensures an immediate reduction of the debt. Also the interest payments decrease so continuously.
In contrast, there are the following disadvantages:
- No contract changes during the term possible
As a rule, no changes to the contract are possible during the fixed interest period. So if you want to stay flexible, should make special repayments. Even a negotiation of the interest rate, for example, because the interest rate decreases, is usually not possible.
- Interest rate risk after expiry of the fixed interest rate
For the follow- up financing there is a risk in terms of interest. It is not foreseeable what the interest rate level looks like after the end of the fixed interest period. However, if you want to secure the low level of interest rates, you have the option of taking out a forward loan. But the interest rate commitment must expire in one to five years.
- Redemption of the loan amount at the beginning of low
In the beginning, the repayment of the loan proceeds only slowly, because first a very high part of interest is paid.
When does an annuity loan make sense and what are the options?
The annuity loan is useful if you are planning a home loan and therefore it is about larger sums and long maturities. In addition, the interest rate risk associated with this type of loan is relatively low. The course of the fixed interest period can also be precisely planned to the euro.
In addition to your annuity loan, you can negotiate options with your bank.
So there is the possibility to arrange special repayments. Then you can make unscheduled payments interest-free. With this method, you reduce the residual debt faster.
Arrange for as long as possible a non-provisioning time, because often the banks calculate supply interest. These will only be incurred six or twelve months after the loan is granted. If, for example, your construction project is delayed, provisioning interest can lead to extreme unplanned additional costs.