Equal or decreasing installments – which are cheaper?

When analyzing cash loan offers, it is worth paying attention to how we will pay the amount due. In the case of installment loans, two solutions are available: equal and decreasing installments. Both forms of repayment have their advantages and disadvantages. At the beginning let’s look at what the loan installment depends on. Later, we will go to the merits and check what our experts advise – will equal or decreasing installments be more beneficial for our budget?

Credit installment – what it is and what it consists of

Credit installment - what it is and what it consists of

The popularity and amount of mortgage loans in Poland is growing every year. The Credit Information Bureau says that in January 2019, Poles applied for loans for an average amount of PLN 260,000. zł. Compared to 2018, this gives 16 percent. increase in the amount of this type of liabilities [1] The topic of loan for an apartment is also inseparably connected with the topic of loan installments – that is, the monthly cost of a liability, which consists of two parts:

  1. capital installment – part of the borrowed amount,
  2. interest installment – a part added to capital, the amount of which depends on the interest rate on the loan, which is simply a profit for the bank.

Credit installments must be repaid monthly in accordance with the repayment schedule. This document is always attached to the loan agreement. Installments can be repaid via online transfer or directly at a bank branch. Each borrower can choose the type of tranches for the commitment. They can be:

  1. equal (annuit) installments,
  2. or decreasing installments (variable).

What to consider when choosing them and which ones are more profitable? It all depends on the borrower’s situation, his creditworthiness (if it is too low for a loan for an apartment, you can think about a cash loan without certificates) and the value of the property you want to buy.

It should be remembered, however, that interest on the installment interest is not the only element in the cost of the loan. As borrowers, we also pay for various types of insurance premiums (depending on the given offer), commission for the lender or administrative fee. There are also one-off costs of obligations, such as registration fee or preparation fee (contracts, consideration of the application, etc.). Anyone looking for the cheapest mortgage will carefully analyze all these components – to finally pay the least amount.

Equal and decreasing installments – differences

Equal and decreasing installments - differences

Both annuit and variable installments should be repaid within one month according to the set deadline. The difference, however, is the amount that the customer transfers to the bank every month. In the case of equal installments it will always be unchanged.

At first, however, the borrower repays primarily the interest – they are the majority of the loan installment. Only a small percentage is the capital installment. It is only with time that these proportions change, which means that the first years of repayment by equal installments is paying the bank for allowing us to take a loan.

We have the opposite situation in decreasing installments. The client repays exactly the same amount of capital every month, plus interest accrued on him, which makes up one loan installment. Therefore, its final height will always be different. The first tranche will always be the largest, and the last tranche will always be the smallest. The purpose of this solution is faster loan repayment and reduction of interest, i.e. payment to the bank for granting us a given obligation.

Equal or decreasing installments – comparison

Many banks have calculators on their pages that allow you to simulate and compare the offer of equal and decreasing installments. It should be remembered, however, that such calculators usually do not include commissions or other costs except bank interest. The cost of the loan, and hence the installments also depend on the own contribution.

Decreasing installments calculated for a loan for 300,000 zł

Amount of credit Loan time Interest The amount of the first installment The amount of the last installment Total installments
PLN 300,000 Twenty years 3.4 percent PLN 2,100 1 253, 54 PLN PLN 402,425

Equal installments calculated for a loan for 300,000 zł

Amount of credit Loan time Interest The amount of the first installment The amount of the last installment Total installments
PLN 300,000 Twenty years 3.4 percent 1 724, 50 PLN 1 724, 50 PLN 413 880, 70 PLN

Simulation showing how the cost of installments will decrease over the past 20 years:

Based on Expander bank installment calculator.

According to Open Finance estimates from the beginning of 2018, Poles could save up to PLN 519 million annually if they chose decreasing installments as a way of paying off loans [2] . Variable installments allow you to pay interest lower by 15-20%. For many people, however, this method of repayment is not available because they have the creditworthiness that allows them to take out a loan for an apartment only with equal installments. In addition, equal installments are still more popular and trusted in Poland than decreasing ones.

Advantages and disadvantages of annuity and decreasing installments

Advantages and disadvantages of annuity and decreasing installments

Equal or decreasing installments? Unfortunately, this question cannot be clearly answered, because everything depends on the situation. Each of these loan repayment methods has its pros and cons, all you need to do is take them into account as much as the profitability of a given bank offer.

Among the advantages of decreasing installments can be calculated:

  1. quick loan repayment,
  2. lower total cost of the commitment,
  3. faster capital repayment,
  4. decreasing installments, and thus gradually relieving the household budget.

The disadvantages include:

  1. the need to have a creditworthiness higher than that required for equal installments,
  2. greater burden on the household budget at the beginning of paying off the loan – when the installments are the highest,
  3. it is not possible to set up a direct debit on your bank account – the loan installment will usually be of a different size.

Equal installments are less burdensome for the wallet (at least when it comes to first repayments), but they are also not without flaws.

  1. Annuity installments are tantamount to a higher cost of credit – such tranches pay back more slowly, so ultimately the customer pays a larger amount than in the case of decreasing installments.
  2. Equal installments are also repaid longer – the first installments are mainly to pay interest, i.e. the cost of taking the loan!
  3. Paying liabilities with annuity installments means taking a loan for a longer period than would be the case with decreasing installments.

However, these disadvantages do not mean that equal installments cannot be profitable – they also have many advantages:

  1. fixed installment amount – the unchanged amount allows, among others setting a direct debit on your account and planning expenses in your home budget,
  2. higher creditworthiness,
  3. increased ease of obtaining a loan – the banks’ requirements for borrowers are getting sharper every year, which is why every factor facilitating the commitment is important,
  4. borrower’s psychological comfort – he does not have to worry about how much he should pay in a given month.

Loan overpayment or decreasing installments – what to choose

Loan overpayment or decreasing installments - what to choose

A variable installment is often referred to as a quick loan repayment method. However, you can also pay off your mortgage quickly if you have previously chosen annuity installments. This is possible thanks to the option of overpayment of the loan. It consists in transferring a larger amount to the bank than assumed in the installment. This can be done in accordance with the loan repayment schedule or outside of it, but you must contact the lender before making an overpayment.

If the bank agrees to early repayment of installments, the customer may make overpayments. There are, however, situations in which the contract concluded with the bank prohibits early repayment of the loan or includes charging an additional fee for repayment of the loan before the deadline. Some banks include a provision in the loan agreement according to which only part of the loan can be repaid for the first three years – from 20 to 30%. Some institutions charge a commission for each overpayment which is transferred to the bank within the first three years of repayment.

Therefore, every customer should pay attention to the provision regarding the conditions for early repayment of the loan when signing the contract with the bank. An overpayment can become an additional cost of the mortgage, so if someone thinks in advance about repayment in advance, then you should be prepared to take on the commitment with decreasing installments. And if variable installments are impossible to take for some reason, it is worth to wait with overpayments until the time specified in the loan agreement as the time when we do not pay additional fees for early repayment.

A reverse situation than overpayment is grace period. It is worth checking whether the institution is considering temporary financial problems for its clients and whether it has appropriate solutions for this type of situation. If not, then not repaying for up to one month can have severe financial consequences.

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