Annuity payment: what is it and how does it differ from differentiated

When offering one way or another to repay a loan, the bank is primarily concerned about its own benefit. The monetary expression of this benefit is interest. It is according to the method of calculating and collecting interest that loan payments are divided into annuity (equal) and differentiated (decreasing).

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• Annuity payment - this represents equal monthly tranches spread over the entire loan term. The tranche amount includes: part of the loan debt, accrued interest, additional commissions and bank fees (if any). At the same time, in the first months (or years) of the loan, the majority of the tranche is interest, and the smaller part is the repayable part of the principal debt. Towards the end of the loan, the proportion changes: most of the tranche goes to repay the “body” of the loan, and a smaller part goes to interest. At the same time, the total size of the tranche always remains the same.
• Differentiated payment - this represents unequal monthly tranches, proportionally decreasing over the loan term. The largest payments are in the first quarter of the term, the smallest in the fourth quarter. “Average” payments are usually comparable to an annuity. Every month the loan amount is reduced by an equal share, while interest is calculated on the balance of the debt. Therefore, the tranche amount varies from payment to payment.

Most borrowers, when they come to the bank, worry much more about approving a loan application than about the type of payments. Although some advanced citizens, having heard that you can save on interest and that there is an option to pay less and less from month to month, are interested in the opportunity to get a differentiated payment schedule.

And mortgage borrowers sometimes even specifically look for a bank that is 100% likely to provide such a service. There is a reason for this, given housing prices and the size of mortgage payments, a gradual reduction in payments does not seem out of place. But is it as beneficial as it might seem when you first get acquainted with the topic?

Annuity loan payment - what does it mean?

By applying for a loan, a person immediately receives the required amount in his hands, which he can dispose of. But no financial institution will simply give a loan to a client. This is a service and must be paid for. Therefore, the bank includes its cost in the amount of funds provided.

It follows that each contribution consists of:

• the amount that repays the principal debt;
• interest for the fact that the bank provides you with this service.

In addition, the monthly fee may include a commission fee, insurance and penalties. This is usually a lump sum payment and is only a small amount of the principal amount of the loan. When applying for a loan, the bank's interest calculation scheme will affect the overpayment. A differentiated repayment system turns out to be more profitable. Equal payments of the principal are made first, and interest is calculated on the balance. Every month the debt decreases, and along with it the overpayment decreases.

But credit institutions are interested in receiving benefits, so most likely, when lending, you will be offered an annuity debt repayment scheme.

Annuity payments are loan installments, the amount of which remains the same monthly for the entire term.

Formula for calculating annuity payment

The annuity payment is calculated using the formula:

P = F x C

This shows that the greater the calculation factor (F) and the amount of the main loan (C), the greater the monthly payment (P).

The design factor is determined by the formula:

Ф = M x (1 + M)^n / (1 + M)^n - 1

It turns out that:

• with an increase in the monthly rate (M), the calculation factor (F) increases;
• the longer the loan term in months (n), the lower the calculation factor (F).

Using this formula, you can calculate the monthly payment that suits you. But on the websites of large financial and credit organizations, you can use an online loan calculator for annuity calculations.

To conduct an online annuity loan calculation, you will need three values: amount, term and interest. Based on this data, you can create a monthly payment schedule on the credit institution’s website. This applies to the simple version of the calculator. But annuity calculation can also be done in its extended version. Here you can add a monthly fee, for example for account maintenance or early repayment. In the same way, a one-time commission is added; this can be compulsory life insurance.

Create an annuity loan repayment schedule on the website. You can save it or send it by email. And then compare it with the schedule that will be provided to you in the bank’s credit department. And if you decide to make sure that the lender is honest, then use the formula to calculate the annuity payment yourself.

Differentiated payment and annuity payment: what is the difference and which is better

The borrower has two ways to repay the loan: differentiated and annuity. Each of them is monthly contributions calculated for the entire term. The significant difference between them is in the structure.

According to the differentiated scheme, the initial contributions will be large amounts, but gradually they will begin to decrease. It is beneficial for the borrower to deposit large amounts in order to reduce the balance of the debt on which interest is charged. The more money you can pay under this scheme at the beginning, the less the loan body itself will remain and, accordingly, the accrued interest will decrease.

At the beginning, you pay the loan amount and interest in equal parts. Then these amounts are reduced and by the time the loan is fully repaid, payments become significantly smaller. But early repayment of part of the loan will only reduce the monthly installment.

This system does not provide for a reduction in the loan term. Due to the constant change in the amount, it can be difficult for the borrower to control the payment schedule. Therefore, there are cases of delay, mainly due to the appearance of third-party expenses that were not taken into account when applying for the loan.

Credit organizations, when issuing loans, use the annuity system. It is clearly more profitable for the bank and convenient for the client. The differentiated scheme has long been outdated. And even in those few credit institutions that offer this payment method, you will rarely find people willing to use it.

When signing a loan agreement, read the clauses about the proposed repayment method: differentiated or annuity. This must be specified in the conditions. But you may be given the opportunity to make your own choice.

The annuity fee is a fixed amount that does not change throughout the entire loan term. Equal shares into which the loan is divided consist of accrued interest on the loan and the principal debt.

With a differentiated loan repayment method, the monthly amount is reduced. You will pay the loan body in equal installments. But at the same time, the balance on which interest is charged is constantly decreasing.

The advantage of the annuity scheme is that the amount of monthly payments is the same, and it remains unchanged throughout the entire loan term. You don’t get confused with numbers, remember just one amount and pay it every month. With a differentiated repayment schedule, you will have to contact the bank each time to clarify the next amount to deposit.

The monthly contributions of the differentiated system will be significantly higher than the annuity system. Therefore, the requirements for your solvency are 20–25% higher than if you took out a loan using the annuity system. But towards the end of the loan repayment period, the first borrower will pay less than the second.

Here's a good example. Two borrowers took out 100,000 rubles on credit from the bank for 1 year. The rate is 17% per annum. According to the annuity schedule, you will need to pay 9,120.48 rubles monthly. The cost of the loan in this case will be 9,472.18 rubles. And according to the differentiated system, the repayment schedule will be as follows: the first month - 9,750 rubles, the second - 9,631.94 rubles, the third - 9,513.89 rubles. etc. The last payment will be 8,451.43 rubles.

For the second client, the cost of the loan will be RUB 9,208.34. This overpayment is less than in the first case, by 263.84 rubles. Of course, if the loan amount is significantly larger, this difference will be more impressive.

But credit organizations also take this into account, so in most cases they offer debt repayment using an annuity scheme.

Even if the bank offers you to choose your own payment method for the loan, do not immediately chase benefits and savings. Re-analyze your options now and in the future.

Important! When choosing loan terms, you should first of all pay attention to the rate offered by the bank. And only then on the method of repayment. Ideally, choose one with a low overpayment percentage and differentiated monthly contributions.

1. Who will benefit from an annuity payment schedule?An annuity loan calculation is suitable for a borrower with a stable income. Knowing the exact amount to deposit, he does not need to check the schedule and leave a different amount of money each time to pay off the debt. Advantages of annuity payments:
   minimal risk of non-payment of debt. Knowing the amount of the annuity contribution, it is easy to plan a budget;
2. If you repay part of the loan ahead of schedule, the amount of subsequent payments will decrease.
3. Who will benefit from a differentiated payment schedule?It is suitable for a borrower with a regular but not fixed monthly income. It is important to consider that it is enough for the loan installment (the largest first payment is considered), paying for utilities and purchasing food. Advantages of differentiated payments:
   • by the end of the loan period, the amount of monthly amounts decreases;

   the overpayment on the loan will be less.

Here is another example of how an annuity schedule differs from a differentiated one.

We decided to renovate the apartment and buy new household appliances. According to calculations, we will need an amount of 845 thousand rubles. We contact a credit institution for a loan. The bank approved us 880 thousand rubles. at 14.9% per annum. We will leave the difference of 35 thousand rubles for unforeseen expenses. Duration – 3 years. There is no commission or insurance.

On May 20, 2021, we sign a loan agreement, and on the same day the bank transfers 880 thousand rubles to our card. Now let's compare loan repayment schedules.

Annuity chart:

Differentiated schedule:

Based on these calculations, we find that with a differentiated scheme, the overpayment on the loan is less: 1112211.39 - 1095710.00 = 16501.39 rubles. This means that it is more profitable than an annuity.

But if we consider all the circumstances surrounding loan repayment, then a differentiated payment system is beneficial only for mortgage lending or for a client with a good financial situation. With a long term, you will be able to save a lot, but in the first half of the loan your budget will be significantly weakened.

An annuity type of loan is convenient for consumer lending. The period for which it is issued is from 2 to 5 years. During this time, the overpayment will be insignificant, and you will not experience any unnecessary financial burden.

Our advice: if you have free money, spend it on paying off your loan. This way you can reduce the cost of borrowing funds.

Not for the borrower mortgage

Russian banks are not very fond of differentiated payments, since they imply a certain subtlety associated with assessing the borrower’s solvency (i.e., the ratio of income to the monthly payment).

The fact is that with a differentiated schedule, the biggest burden on the debtor’s budget comes from the first year’s payments, and the ratio to income is calculated specifically for this period.

Bank loans - what types and forms exist

For example, the borrower indicated in the application form an income of 60,000 rubles, and the first payment under the differentiated scheme will be 25,000 rubles, that is, it will “eat up” almost half of the income. And according to the law, loan payments in any case cannot exceed 50% of income. As a result, banks are forced to lower the maximum loan amount that can be issued based on the declared income level.

The situation is really difficult, both for the lender and for the borrower, since the debtor can either “fall off schedule” or be offended by the insufficient loan amount and go to another bank.

Some borrowers who have taken out a mortgage with differentiated payments overestimate their capabilities and ultimately cannot pay the loan.

Only “monsters” with government support, such as Sberbank, Gazprombank and a number of others, calmly take risks. They can afford to issue “differentiated” borrowers almost the same loans as “annuity” ones. But on average, the differentiated scheme is much less popular, and banks deliberately do not promote it, such are Russian realities.

Pros and cons of the annuity type of loan repayment

Let's take a closer look at the advantages and disadvantages of annuity payments.

Banks choose the annuity type of loan payments. And this is beneficial for them, because by charging interest, they earn money. And when offering a differentiated scheme, a credit institution has to take risks. Since it is not always possible to correctly calculate what the borrower’s income should be so that monthly payments do not turn out to be a problem for him. This is why almost 90% of loans are approved with an annuity repayment schedule.

The advantages of this scheme:

• A clear schedule of monthly loan payments.
• Annuity amounts are less than differentiated amounts. In the latter scheme, payments can sometimes reach half of the client's income, and this makes the loan a big problem.

But this calculation method does not bring benefits to the borrower, since the overpayment turns out to be larger. And this is the minus of annuity charts. If you take out a loan for a short period, then this drawback will not be so critical. But with a mortgage loan, the overpayment can be significant. You should always consider different lending options. In this case, you should pay attention to the principal amount, term and interest rate. There is no universal way to choose a loan repayment scheme.

Types of annuity loan

There are two types of annuity payment: immediate and deferred. In the first case, the client makes the first payment immediately, and in the second at the end of the month. In Russia, in the field of consumer lending, deferred annuity payment is used, when the client takes out a loan and makes payments according to the schedule.

Examples of how to calculate annuity payment repayment

The first example of calculating the annuity contribution. For convenience, perform calculations on your computer using Microsoft Excel.

We were given: loan amount - 1 million rubles, term - 3 years, rate - 20% per annum. The agreement provides for an annuity method of repayment.

1. Let's calculate how much the interest rate is per month: divide 20% by 12 months and get 0.017%.
2. We determine the annuity coefficient: (0.017 * (1 + 0.017) ^36) / ((1 + 0.017) ^ 36 - 1) = 0.037184.
3. Let's calculate the annuity payment: 0.037184 * 1,000,000 rubles. = 37,184 rub.
4. The overpayment on the loan will be RUB 338,623.

If, according to the terms of the agreement, the loan had been repaid in differentiated payments, then the overpayment would have been less, namely RUB 308,333.33.

Second example. Loan amount – 1 million rubles, interest rate – 14%, repayment according to an annuity scheme. The monthly payment and overpayment will depend on the term for which the loan is granted. If, of course, the borrower regularly follows the established loan repayment schedule.

In order to calculate the monthly interest, you need to multiply the remaining balance of the loan by the annual interest rate and divide by 12. Here is how the amount of the down payment on the loan is calculated:

1,000,000 x 0.12 / 12 = 10,000

Based on these calculations, it turns out that the first annuity payment in the amount of 11,011 rubles. consists of: 10,000 rub. – interest, bank remuneration and 1,011 rubles. — body of the loan.

With a differentiated system, the overpayment on the loan will be less than on the annuity system. But if you make equal monthly payments, strictly following the schedule, and use the free part of the money to pay off your debt early, then using any of the two systems you will be able to pay off at the same time and with the same overpayment.

But if your financial situation suddenly changes, then it will be easier for you to repay the loan under an annuity scheme with equal smaller amounts than under a differentiated scheme.

Why is it profitable for banks to issue an annuity payment?

And when the client plans to take out a loan for 500-600 thousand rubles. and conclude an agreement using a differentiated method, there is no guarantee that it will cope with the increased financial burden. The fact is that in the first months you will need to pay most of the amount, but with an annuity the amount is evenly distributed. This benefits both parties.

It is easier for the bank to assess the client’s financial situation, and it is convenient for the borrower to pay the same amount month after month. In the end, everyone is happy, but due to the interest rate, lenders receive a profit that is higher than with differentiated payment.

Calculation of annuity payment in Excel

If you are planning to take out a loan, it would be best to calculate your payments in advance. This way you will protect yourself from disappointment when the overpayment on the loan turns out to be too much in the future.

You can calculate loan payments not only with a calculator. It will be more convenient to carry out such calculations on a computer, because each of them has a program for working with Excel spreadsheets.

Here's how to calculate an annuity loan using the PMT function:

• Open a new sheet and set the appropriate function in a free cell.
• Enter the data requested by the program.

Now the number you are interested in automatically appears in the cell. Please note that these are fairly simple calculations. The program does not require any clarification, but in a real contract the nuances can be specified.

So, using Excel, you can independently calculate the monthly amount under the annuity scheme at home. And using additional functions of the program, such as OSPLT and PRPLT, you can calculate payments on principal and interest.

The annuity payment schedule is simple and transparent. After several payments you can forget about it. If a loan has become a necessity for you, then this type of lending will be convenient.

Early repayment of annuity payment: types and nuances

There are two types of early repayment:

• partial – this is the payment of an amount not provided for in the payment schedule;
• one-time payment, when the entire remaining amount is paid at once.

As a result of such actions, the credit institution loses part of the income that was calculated when issuing the loan. If a client took out a loan today and returned it two weeks later, then the bank lost its profit. Despite this, almost all lenders provide the borrower with this opportunity under certain conditions.

For the client, partial early repayment of the debt is beneficial, as the overpayment will be reduced. For example, a bank issued a loan of 500,000 rubles. and charges interest on this amount. After some time, the borrower returned 100,000 rubles. The bank remains at a loss, since now interest will be accrued on the remaining 400,000 rubles.

Is it profitable to pay a mortgage with an annuity payment?

A targeted loan for the purchase of real estate is often issued by citizens in our country. Is an annuity or differentiated mortgage repayment scheme suitable for the borrower in this case?

A huge number of banks issue mortgages using an annuity payment scheme, while the differentiated offer is limited. It is impossible to give a clear answer as to which is better. The conditions for issuing money in different credit institutions do not differ much; it all depends on internal policy.

Take any lending program where you can choose the scheme for calculating monthly payments: the amounts, rates and terms do not change. When choosing, focus on your capabilities. Sometimes it is more profitable to take out a mortgage on real estate from a developer of one bank at 7.8% with an annuity than with differentiated payments from another bank, but with an overpayment of 11% per annum.

According to experts, if you take out a loan for a period of less than 10 years, then it will be more profitable to repay it with annuity payments. But usually a mortgage is issued for a longer period. And in this case, a differentiated calculation of debt repayment will be more economical. But cost-effectiveness is not the only criterion when choosing a repayment scheme. As a rule, annuity models allow you to borrow a larger amount than differentiated ones.

What are the types of annuity?

To better understand the use of an annuity, you should consider what types there are. Thus, we can note the presence of the following classification:

Loan "Refinancing" VTB Bank, Person. No. 1000

from 5.9%

per annum

up to 7 million

up to 7 years

Get a loan

• deferred - in this case, the first payment is made at the end of the initial period;
• immediate – payment is made at the beginning of the zero period.

If we talk about the annuity used in the lending industry, then there is a deferred annuity.

In addition, it is common to distinguish different types of annuity value, namely:

• given;
• the future value of the annuity.

This division is due to the desire to determine the maximum objective value of funds used for lending. Both the future and present value of an annuity are calculated in a specific way using specific formulas. The calculation of the present value of an annuity depends on a number of factors.

It is worth noting that due to the theory that over time, money can depreciate due to inflation, there is such a thing as the present value of an annuity. Lost profits also play a role here, because if the lender had kept the issued funds, he would have had the opportunity to receive income in the form of interest on the deposit.

Loan "Refinancing" Gazprombank, Lit. No. 354

from 5.5%

per annum

up to 5 million

up to 7 years

Get a loan

Final recommendations when choosing a loan payment type

When choosing a loan, you can specify not only the type of payment, but also the interest rate, commission, payment periods, etc.

1. Interest rates
   The fixed rate may remain throughout the entire loan term, or may change at different periods. For example, in the first year it will be 13%, in the second - 14%, in the third - 15%, etc. Or another option: for the first five years the percentage remains unchanged, and then changes. Such nuances are always specified in the loan agreement.
2. The rate, depending on the market indicator, may change. It is acceptable to set boundaries within which changes will occur. This variable rate is reviewed several times a year; this condition is stated in the contract. Changing it may lead to recalculation of monthly payments and loan term.
3. The rate can be combined: for a certain period it will be fixed, and then it will become variable.
4. Commission charged by the bank for servicing the account
   The amount can be fixed, or a percentage of the remaining debt or monthly payment can be calculated.
5. If you are transferring money from another bank, there may be a separate fee for this each month.
6. They can calculate the percentage of the entire payment with established maximum and minimum limits.
7. The amount can be expressed as a percentage of the loan amount.
8. Payment periods
   It is possible to get a loan without monthly payments. Interest is withdrawn for the entire term only once on the maturity date.
9. The payment period may be not 30 days, but 14. For legal entities, there are offers with repayment intervals of more than a month.
10. It is possible to round up the amount by reducing part of the contribution. Then the rest of it will be transferred to the last payment.
11. Payment holidays
    You can defer the payment of the loan principal for a certain period, but continue to pay only interest.
12. It is possible to defer payments on the terms of partial payment of the loan. For example, from such and such a month to such and such you will not pay the principal, only interest. Or you pay off only the principal debt, and pay interest later:
13. one amount after the end of the holidays;
14. the last installment when you close the loan;
15. equal payments for a certain period after the holidays;
16. equal amounts for the entire loan term.
17. Monthly payments
    When the borrower approaches retirement age, according to the terms of the loan, the main part of the debt must be paid before retirement. Subsequent payments will be smaller. This will make it easier for the pensioner to fulfill loan obligations, since now his income will be lower. Changes in monthly payments are possible depending on the age and income of the borrower.
18. An increase in monthly payments is also allowed. For example, if you know that in the future your salary will increase or additional income will appear.

Does the bank allow you to change your payment method after the loan is issued?

Here you need to carefully look at the loan agreement. The legislation does not provide for such a feature of changing the payment method as the loan is repaid. And no one will force the bank to meet the client halfway.

In Russia, you can apply for a differentiated loan only at Gazprombank and Rosselkhozbank, but remember that in this case you will have to give most of the budget to the bank in the first months. Can you withstand such a financial burden? If you have to give away more than 40% of your income every month, life will not be comfortable. You will have to deny yourself everything, from buying clothes to purchasing groceries.

And if, while paying off the loan, you realized that it is easier to switch to the annuity method of paying for the loan, the bank has the right to refuse this on legal grounds. Think in advance about how it will be more profitable to repay the loan and make an informed decision. And if you realize that you can’t cope with your credit load or have lost your job altogether, think about bankruptcy. Using this method, you can legally write off debts to creditors.

Advantages of an annuity payment

• Convenient repayment schedule - equal monthly payments.
• The interest rate is lower than with a differentiated loan.
• It is convenient to plan a family budget, since the payment amount does not change.
• It is allowed to deposit a larger amount than stipulated in the contract, which reduces the overpayment.

Disadvantages of an annuity payment

• Some banks impose penalties for early repayment.
• The overpayment will be greater than with a differentiated loan.

Submit an online request for a free consultation from IBC to learn more about payments.