Installments equal or decreasing guide for those taking a loan or a loan. When deciding on a loan or a loan, not only do we have to choose a bank, but also decide on what system of installments we decide. How will we pay off our liability: fixed installments or decreasing installments. Check below how they are calculated and what are the main differences between them.
The vast majority of borrowers decide on equal installments because it seems the simplest and the most clear. But there are still decreasing installments, and what is more interesting is very often the choice more favorable to the borrower. What is fixed installment and what is different from the decreasing one? When is it worth choosing fixed installments and when decreasing?
What better fixed or decreasing installments?
Each borrower has to decide what will pay him more: regulate debt in decreasing installments or fixed installments?
Equal installments (annuity, fixed or averaged) – their amount remains at a similar level throughout the loan repayment period.
Declining installments – at the beginning of the repayment period installments are characterized by high amounts, but they gradually decrease as the loan period expires.
Each installment, regardless of which loan we pay, consists of a capital and interest part.
The capital part – the repayment of the part (principal) borrowed from the bank.
Interest portion – interest on capital, the amount of which depends on the nominal interest rate and the duration of the loan.
Depending on the proportion in the installment of the principal and interest part, we distinguish fixed and decreasing installments.
Fixed loan installments
In the case when we decide on fixed installments, they will be in the same amount throughout the repayment period. Of course, provided that the interest rate on the loan does not change or we chose a loan with a fixed interest rate.
The capital part increases with each installment. At the beginning of the loan repayment, the installment consists largely of the interest part. At the end of the loan repayment, the reverse is true and the major part of the installment consists of repaid capital, and the smaller one is interest.
Who is the better choice for? The fixed installment system is more profitable for borrowers taking small loans. In the case of loans for a larger amount or mortgage loans, decreasing installments will be more favorable.
The installment decreases with the next repayment of the loan installment, ie in the following months the installment is getting smaller and smaller (assuming the assumptions, as above: interest on the loan does not change or it is a loan with a fixed interest rate).
In decreasing installments, as opposed to fixed installments, the capital part of the installment throughout the repayment period is unchanged. However, the interest part changes.
The decreasing installment is therefore the highest at the beginning, but then it gradually decreases. This is because with each installment we have less capital to repay, and thus interest is charged on a smaller amount.
Equal installments and falling differences
If we already know what equal and decreasing installments are, then we can mention the basic differences between them.
In the case of decreasing installments, the sum of interest is lower than in the case of equal installments. This is a consequence of a faster repayment of capital, which means that interest is accrued each month from the lower amount of capital.
Remember, however, that by choosing decreasing installments, we pay higher amounts at the very beginning than in the case of fixed installments.
When choosing decreasing installments, we must have a higher credit rating than fixed installments. The system of decreasing installments is intended for those borrowers who can significantly encumber the home budget in the initial repayment period.
Declining installments are also beneficial in the situation when we anticipate the possibility of early repayment of the liability. They may be more beneficial in the shorter lending period, because the differences between the decreasing and equal installments are smaller.
Fixed installments should be used by people with lower creditworthiness, and thus do not want to overburden their finances in the initial phase of loan repayment. In addition, fixed installments are easier to include in the home budget – we know how much the installment is over the entire debt repayment period – and thus it is easier to plan future expenses.