What is loan amortization?
A loan is deemed “depreciable” when its due dates include the repayment of part of the capital borrowed, plus interest on the loan. constant, linear, good : there are different forms of depreciation.
How to calculate the amortization of a loan?
The amortization of a loan corresponds to the time required to repay all of the capital borrowed, plus loan interest and insurance costs if it is a mortgage.
In practice, this amortization is accessible through the schedule given to the borrower and the amount he must repay, most often in the form of monthly payments. This schedule, also called amortization table, is a dashboard allowing you to view the share of capital repaid on a due date, and the amount of capital due before settling the loan. The table includes a number that details the amount of each installment, distinguishing the principal (borrowed capital), interest, and any insurance costs.
Example : 200,000 euros borrowed over 15 years at a Global Effective Annual Rate (APR) of 1.05% will give rise to 180 installments of 1,196 euros. At the end of these 15 years, the borrower will have repaid 200,000 euros in capital + 14,458 euros in interest.
In the event of a real estate project, this provisional amortization table can be obtained by connecting to sites such as that of Anil.
Types of depreciation
The proportion of interest and credit amortization varies over time, in particular depending on the amortization method chosen by the borrower.
This formula concerns the majority of loans taken out. This is the most secure formula: with it, the borrower repays the loan over installments, the amount of which is invariable from the beginning to the end of the loan. In practice, the portion of interest repaid is higher at the beginning than at the end of the loan, but the monthly payment remains the same.
Straight line depreciation
With this option, the amount of capital repaid at each maturity is always the same. As a result, the interest due gradually decreases since its amount is determined according to the capital remaining to be repaid. The maturities are therefore decreasing over time.
This formula allows the borrower to vary the amount of the repayment installments according to his financial availability. The loan period can thus decrease if the borrower chooses to increase his monthly repayments following a financial inflow. Conversely, it lengthens if he reduces the amount of the installments, knowing that the amount of interest increases in due proportion to this lengthening.
With this financing formula, the borrower repays the entire loan in one installment at the end of the loan. The monthly installments relate only to the payment of interest, which makes it possible to reduce the amount of the installments. The amount of interest charged will be identical at each due date since the capital due is constant throughout the loan. Disadvantage of this formula, the amount of interest due will be higher than with an amortized loan.
Before granting this type of credit, banks ensure that the applicant has solid financial guarantees. They can, for example, ask for the pledge of a life insurance contract.
How to choose the method of amortization of your credit?
Constant amortization is best suited to the majority of borrowers since it allows you to know from the beginning which foot to dance on until the end of the loan. There are no unpleasant surprises, the amount of the installments does not change.
Good to know : if you are considering early repayment, it is better to do so as soon as possible, since the interest is higher at the beginning than at the end of the loan.
In the case of income with variable geometry, flexible amortization can be an interesting solution, but it is rarely offered by banks. So you have to ask for it.
Finally, the depreciation goodwill be of particular interest to real estate investors since the repayment of the capital can be ensured through the resale of the property or through the capital accumulated on a savings contract.
The deferred amortization allows the borrower not to repay capital during a given period in order to preserve its purchasing power thanks to reduced maturities. This possibility generally occurs at the start of the loan, in particular when acquiring a property off-plan (sale in a future state of completion).
The deferred amortization can be partial or total. In the first case, the repayment of the capital is deferred, but the interest is debited as well as any insurance costs. If the deferral is total, the monthly payments relate only to the insurance premiums until the end of this parenthesis.
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