Every month you repay and pay interest on your private loan. How big your total monthly cost will be depends on the loan arrangement – whether you choose an annuity loan or any other arrangement.
So what does annuity lending really mean?
Annuity loans are the most common arrangement when it comes to private loans. This means that you pay an equal amount every month – a mixture of interest and amortization. At the beginning of the loan period, the monthly payment consists mostly of interest. Later, when the debt decreases, so does the interest rate. Then every month there will be a little less interest and a little more amortization in each monthly payment, but you always pay the same amount every month.
The second way to set up a loan is straight down repayment. This means that you pay off equally each month. The interest rate, on the other hand, is higher in the beginning and then decreases, month by month, as the debt decreases. Therefore, the total monthly cost is also higher in the beginning, but decreases as you amortize.
Annuity loans or straight amortization, which is best?
Both methods of amortization have their advantages and disadvantages. The biggest advantage of an annuity loan is that you know in advance how much to pay each month. Since the loan costs just as much all the time, it becomes easy to calculate the household budget. The disadvantage is that the total cost of the loan is often higher. For loans with collateral, e.g. car loan and caravan loan, it is exclusively annuity it is concerned. Only a few players offer straight amortization.
If you instead choose a loan with straight amortization, you get a total cost that is lower. This is because the debt decreases at a faster rate because you are paying off the same amount from the beginning. The major disadvantage is that it becomes more expensive per month at the beginning of the loan period when the interest rate is at its highest. Therefore, you need to make sure you have the financial space to pay more in the beginning.
What happens if the interest rate changes?
The interest rate can go up or down during the loan period. If you have chosen an annuity loan, the amount should be the same every month, but how does it change with interest rate changes? There are two different types of annuity loans that solve the problem in different ways.
The most common way that banks usually use is called retained annuity, or sometimes false annuity. This means that the fixed amount will continue to apply even if the interest rate changes. Instead, the loan period can be extended or shortened to offset the changing interest rate. To pay the same amount every month which gives security. Read more about Bib Retained Annuity here.
Changed annuity is also called genuine annuity. Then the bank instead makes a new calculation of what you have to pay to adjust for the higher interest rate. The same loan period will apply, but the amount each month may increase if the interest rate does. The loan is thus paid off at the same time as you had intended, but it can become more expensive per month during the period. Read more about changed annuity here.
Benefits of comparing the banks
No matter how you want to set up your loan, you can save a lot on comparing the banks. All banks specialize in different types of customers. It is therefore not possible to say that one specific bank is better than another in advance. This is why it is important to compare different loan offers to find which bank suits you best! Apply with us to compare the banks and find the cheapest loan on the market!
If you as a private individual go to several different banks to compare the terms, they each take credit information on you. This affects your credit rating and can impair your ability to get a really low interest rate. If you choose to compare with Astro Finance, only one credit report is made. The service is completely free of charge and you do not commit to anything when you make a comparison. Instead, Astro Finance gets paid directly by the bank or lender when we can help them get a new satisfied customer.