The repayment loan is also commonly referred to as a “repayment loan”. Compared to the annuity loan, it plays a minor role in lending. First and foremost, repayment loans are used for real estate financing. The choice of the loan form has a significant impact on the monthly installment, especially for high loan amounts. Therefore, the type of loan is especially important when calculating the installments. In particular, when building or buying a property, borrowers should make an exact loan comparison to find the appropriate financing option.
Difference repayment loan annuity loan
In the repayment loan, a fixed and constant repayment is agreed. Although the loan amount is getting smaller and smaller, the repayment amount does not change. The overall rate consists of repayment and interest. At each rate, the outstanding amount of credit and consequently the interest payable decreases. This results in a declining rate over the agreed term. Characteristic of a repayment loan is thus a higher rate at the beginning, which is getting smaller as the years go by.
On the other hand, the annuity loan is agreed to have a fixed monthly rate over the entire term. Again, the rate is composed of an interest and a repayment portion. However, as the rate does not change, eradication continues to increase. In comparison to the repayment loan, a reverse effect occurs here. The longer the loan runs, the higher the repayment effect of the installment.
Example of a repayment loan
- Loan over 100,000 euros
- Annual percentage rate 5%
- Monthly repayment 500 euros
For a repayment loan over 100,000 euros, a monthly repayment of 500 euros is agreed. The annual percentage rate is 5 percent. This results in an annual repayment of 6,000 euros over a term of 16 years and 6 months. In the first year, the interest payable amounts to 4,500 euros. All in all, the borrower has to pay 10,500 euros to the bank over the year. In the second year, only 4,200 euros in interest due. The repayment remains identical with 6,000 euros, so that the annual burden is only 10,200 euros. Over the term, the burden decreases more and more until they are paid last year, only 6,200 euros.
Of course, this example calculation can also be applied to the monthly rate. In the repayment loan, the amount to be paid is determined monthly from repayments and interest. The interest rates are very high at the beginning of the term and then fall more and more. In the repayment loan, the borrower immediately starts repaying, instead of paying interest only for months on end.
Advantages and disadvantages of repayment loans
A repayment loan offers advantages especially for very high loan amounts with long maturities. Due to the already very high repayment at the beginning, the residual debt and the associated interest rates fall faster. Debt relief is thus faster overall. The falling burden also has a positive effect on this. Freed funds can be used for other purposes.
The disadvantage is an initially higher burden compared to the annuity loan. This can be a problem especially for young families and other low budget borrowers. If the eradication is reduced at a later date additional costs arise. For this reason, the repayment loan for numerous builders or real estate buyers is not possible or at least not recommended.
A repayment loan is generally suitable for borrowers who can reliably assess their income for the next 3 to 5 years. These include, for example, self-employed and freelancers or employees with fixed-term employment contracts. By contrast, the annuity loan is always recommended if the income is secured over a very long period of time. Constantly equal and increasing revenues have among other things officials, pensioners or landlords.
What to look for in a repayment loan calculator
With a financial calculator, the cost of a loan can be calculated quickly and easily. When calculating, it is important first not to confuse amortization and annuity loans. When calculating a repayment loan, care must be taken that the term is taken into account in addition to the loan amount. This should include the number of repayments per annum and the interest rate. As a rule, a monthly repayment is always provided for private loans. In the case of business loans, this sometimes takes place quarterly or annually.
After entering all the data, the calculator creates an exact payment plan for the desired duration. It is advantageous if the interest and repayment installment is also specified for the installment. Based on the interest charges, comparisons can then be made with other financing options.
Possible maturities for repayment loans
The term of the repayment loan is the loan amount and the fixed repayment rate. For a loan of 200,000 euros with a repayment of 5 percent, the term is 20 years. In general, repayment loans with maturities between 10 and 30 years are offered.
Fixed interest on repayment loans
Repayment loans are offered either with fixed interest or variable interest. For most banks, fixed rates between 5 and 15 years are possible. In the repayment loan, the notional loan amount decreases very quickly, so that a variable interest rate, in contrast to the annuity loan, is less risky. On the other hand, a rate hike at the beginning of the repayment term loan has a less favorable effect, since the initial charge is already very high at the beginning.
Special repayment and termination
If a variable interest has been agreed upon conclusion of the loan, special repayments are possible at any time. The termination is possible with a period of 6 months without additional costs. A prepayment penalty will not be calculated in this case.
The situation is different with repayment loans with a fixed interest rate. Special payments are only possible if they have been agreed in the loan agreement. If this is not the case, the borrower must either prove a legitimate interest or agree to the bank’s termination. If the loan contract sees special payments, it is also determined in what amount this is possible free of charge per year.
Termination is generally possible after a term of 10 years. Provided the borrower can demonstrate a legitimate interest, the bank must also agree to the termination at an earlier date. This would be the case, for example, of a sale of the financed property or if the bank refuses to increase the loan for refurbishment or modernization. The bank, however, a purpose early repayment charge, the amount of which is regulated by law. It must be taken into account, among other things, that a termination after 10 years would be possible anyway free of charge.
If termination takes place without a contractual basis or a legitimate interest, the prepayment penalty may be determined by the Bank at its own discretion.