What is an annuity loan

 

What is an annuity loan?

An annuity loan is a loan in which the repayment amount – the annuity – remains the same over the term. This annuity is made up of interest and principal. Since any repayment reduces the residual debt, the interest portion of the repayment will be lower compared to the redemption portion. In contrast to the annuity loan, the redemption portion is fixed in a so-called repayment loan, whereas the interest portion decreases. As a result, the repayment amounts vary over the term.

Image result for annuity loan art

An example of an annuity loan

In the following example you see an example annuity loan over € 10,000 and 5 years with an effective interest rate of 10% pa The monthly rate is constant over the term € 212. Yellow represents the redemption portion, blue represents the interest portion. Good to see is the reduction of the interest portion over the term at a constant rate. The redemption portion increases from 130 € in the first to up to 211 € in the last month.

Amortization and interest portion of an annuity

Advantages of an annuity loan

The benefits of an annuity loan include transparency and convenience.

Planning security through fixed monthly rate

The repayment rate is constant for an annuity loan over the term. Therefore, when applying, you already know what the monthly rate and the associated financial burden is.

Fixed interest over the term

By concluding an annuity loan, your effective interest rate is fixed and thus tied up over the term. While you are not benefiting from lower interest rates unless you are replacing the loan with a cheaper loan, you are not exposed to the risk of interest rate hikes.

Easy repayment

Image result for annuity loan artWith a standing order you set up the repayment of the fixed rate from the first day and you do not have to worry about repayments until the end of the term. In a repayment loan, the amounts would change regularly.

 

 

 

A Comparison: Annuity Loan Vs. redeemable loan

annuity

year interest repayment annuity Residual debt t-1
1 926,96 € 1,622.68 € 2,549.65 € 10,000.00 €
2 757,05 € € 1,792.60 2,549.65 € € 8,377.32
3 569.34 € € 1,980.31 2,549.65 € € 6,584.72
4 361,98 € € 2,187.67 2,549.65 € 4,604.42 €
5 132,90 € 2,416.75 € 2,549.65 € 2,416.75 €

redeemable loan

year interest repayment annuity Residual debt t-1
1 1.000,00 € 2,000.00 € 3,000.00 € 8,000.00 €
2 800.00 € 2,000.00 € 2,800.00 € 6,000.00 €
3 600.00 € 2,000.00 € 2,600.00 € 4,000.00 €
4 400.00 € 2,000.00 € 2,400.00 € 2,000.00 €
5 200.00 € 2,000.00 € 2,200.00 € € 0.00