Many people planning to take out a loan already have some liabilities towards the bank. When deciding on another loan, the clients of this type of institution usually look for the most attractive offer that will not be a great financial burden for them. The most often chosen finance product can be divided into installments. After selecting the appropriate loan, the bank sends a repayment schedule and the borrower has nothing to do but transfer the appropriate amount to the specified account on a monthly basis.
The loan installment is a monthly cost that will accompany you for a short period or for many years. It may change, because the installment consists of several elements. Among others: interest, insurance, repayment time, commission and loan repayment form. In each loan installment we pay back: part of the debt and interest. The most popular repayment formulas are equal and decreasing installments:
- In installments equal, the sum of capital and interest is always the same. Only the proportions of the ingredients change – interest at the beginning, and capital at the end;
- In decreasing installments, we pay the same amount of capital each time, and the amount of interest changes. It decreases over time, because less and less debt remains to be repaid.
The biggest differences between the equal and decreasing installments are visible in long-term and high-value mortgage loans.
Credit installment – how is it calculated?
The amount of monthly loan installments significantly affects the household budget, especially in the case of liabilities incurred for high amounts, which will have to be regulated for many years to come. There are several elements in the monthly loan installment. The loan installment consists of two main parts: capital installment – includes part of the borrowed capital (loan amount) and interest installment, which includes interest accrued during the given installment.
The loan installment also often includes:
- Commission – a fee that the bank charges for granting a loan. Paid once or included in the monthly installment. Its amount is determined as a percentage of the loan value. If a financial institution offers a commission-free loan, it will otherwise compensate for the loss, e.g. by imposing the need to purchase additional products;
- Interest – one of the main loan costs. The first type of interest rate is fixed rate. It lets you know the installment amount when you take out the loan. The installment does not change during the term of the loan and applies mainly to short-term loans. The second type of interest rate is variable interest rate. Its value is not constant because it depends on interest rates set by the National Bank. The rules for changing interest rates should be indicated in the contract and information form,
- Type of installments – fixed, decreasing and increasing installments. The customer should verify which installments will be most favorable for him and will not significantly affect the total cost of the loan,
- Insurance premiums, e.g. unemployment insurance, life insurance, low contribution insurance, bridging insurance. Credit insurance is voluntary or compulsory, but we will certainly appreciate its importance in a difficult life situation. It depends on the loan amount and the loan period.
When looking at cash loan offers, it is worth paying attention to how we will pay the amount due. In the case of installment loans, two solutions are available: equal and decreasing installments. These two forms of repayment have their advantages and disadvantages.
Equal installments are a repayment option that is very popular among borrowers. This popularity is mainly due to two reasons. The first is that the repayment system is assessed by banks as less risky. This is due to the fact that in the first years the amount of the monthly equal installment is much lower than the decreasing installment, and this significantly affects the applicant’s creditworthiness. Secondly, they introduce a certain order in managing the household budget, although it does not mean that their amount will always be the same.
The vast majority of people taking loans choose decreasing installments. Decreasing installments are often called capital installments because the capital part is always fixed and only the interest on the loan changes.
In fact, decreasing (capital) installments, although cheaper in general, are used much less frequently than equal installments. This is mainly related to the process of assessing the customer’s creditworthiness. At the very beginning, during the repayment period, the decreasing installment places a greater burden on the borrower’s budget, as it can be up to several dozen percent higher than an equal installment. Often it is this parameter that determines the award of funding in the amount requested.