Loans are medium to long-term forms of debt financing in particular and debt financing in general. Depending on the repayment modalities of the loan, a differentiation must be made between annuity loans, repayment loans (repayment loans) and term loans (interest loans). Repayment is the repayment of the loan debt, ie the loan amount paid out. There is usually a transparent repayment plan.
Depending on the repayment method, the borrower repays the loan amount either in the form of installments (annuity loans and repayment loans) or in the form of a lump sum at the end of the term (term loan). The interest payments to be made are generally not included in the term of repayment.
Consideration of interest payments on the annuity loan
In the case of the annuity loan, interest payments are taken into account in comparison with other types of redemption insofar as the interest portion is mathematically proportional to the repayment portion. The annuities are calculated using a special formula. On the internet, loan seekers can use annuity calculators, which can give precise indications of how high the annuities are, taking into account various factors and parameters (such as interest rate, amortization, loan amount, etc.).
The meaning of the term annuity loan results from the concept of annuity. In the original sense of the word, Annuity, in the Latin term “annus” (= year), means the annual rate of repayment and interest on a debt. In the narrower sense, annuity is a constant payment or periodic rate.
Annuity redemption at annuity loan
The characteristic feature of the annuity loan is the so-called annuity repayment, which provides for a repayment of the loan amount in periodically constant installments (flat rates, annuities). In contrast to the capital rates of the repayment loan, these annuities, as already described above, already take into account the interest accrued. The amount of the annuity is calculated by multiplying the loan amount by the so-called annuity factor.
Rates, repayments and interest on the annuity loan
In the annuity loan, the installments per annum (repayment including interest) remain the same for the entire term. It only changes the pro-rata ratio between the repayment portion on the one hand and the interest payment portion on the other. While the redemption portion increases with increasing maturity, the interest portion decreases equally. The interest amount falling per period results from the fact that the loan amount to be paid (residual debt) is continuously reduced by the periodic repayment. The annual changes in the repayment and interest payment portion can be tracked in a repayment plan.
The difference to the repayment loan is therefore that the annuity loan, the total periodic exposure remains unchanged over time. In the repayment loan, on the other hand, it continuously decreases. For the borrower, the advantage of the annuity loan is that its payment obligations remain constant over the entire repayment period. He can therefore exactly calculate his liquidity load per period.
Areas of application of the annuity loan
Annuity loans are the most popular form of repayment because of the steady monthly burden. In the frequency of the award, they exceed the repayment loans. For example, both loans to private borrowers and those to companies are usually designed as annuity loans. As one of the main uses of the annuity loan is real estate and mortgage lending, it is also known as mortgage lending. Especially for self-occupied real estate, the annuity loan proves to be a typical repayment variant because it offers the borrower planning certainty.
The interest rate is usually set at the conclusion of the loan contract for a precisely agreed period. This commitment can extend to the entire term. However, most interest rates are agreed between five and fifteen years. If the borrower has not yet fully repaid the loan at the end of the fixed interest period, he will need follow-up financing in order to pay off the remaining debt. In addition to the interest rate, a specific repayment rate is fixed for the beginning of the term.
As an initial repayment installment, banks typically require a minimum repayment installment of 1% per annum or 2% per annum. It is important to remember that if repayments are low, the repayment term is very long. Therefore, it is advisable to arrange a higher repayment installment for an annuity loan in order to repay the property faster.