Differentiated and annuity payments on loans: what is the difference and which is more profitable

It seems that calculating interest on a loan is easy. It is necessary to multiply the loan amount by the annual interest, and then by the number of years. But the result will be incorrect. The fact is that interest is charged on the balance of the debt, which decreases every month. Therefore, the calculation formula is more complex. And the amount of the monthly payment and the balance of the debt itself will depend on how these same monthly payments are calculated. There are two of them, and we will discuss both.

What is differentiated loan payments

Differentiated payments mean that the loan amount is divided by the number of months for which it is taken credit. Interest is added to the principal payment on a monthly basis. Since the debt is regularly reduced, less and less interest has to be paid every month. And therefore the amount of the total payment is strictly melting.

On the diagram it looks like this:

The picture roughly describes the payments for a loan of 250 thousand rubles at 18% per annum, which was taken for a year. 20,833.33 rubles are monthly credited to the account of the principal debt. Interest in the first month will amount to 3,750 rubles, in the seventh - 1,875 rubles, in the twelfth - 312.5 rubles. The total overpayment is 24,375 rubles.

What are annuity loan payments

Annuity payments mean that the client will give the bank the same amount every month. All-time interest is included, of course. Moreover, the structure of each payment is not the same: in the first months, a significant part of the money will cover interest, so that the principal debt will decrease slowly.

On the diagram it looks like this:

If you take a loan on the same terms as in the block above, then you will need to pay the bank 22,920 rubles a month. But in the first month, only 19,170 rubles will go towards the principal debt, in the seventh - already 20,961 rubles, in the twelfth - 22,581 rubles. And the amount of interest in the payment structure will decrease and will amount to 3,750, 1,958 and 338 rubles, respectively. The total overpayment is 25,039 rubles.

It should be noted that for a short-term loan, the structure does not look critical. But in the long run, for example, mortgage for twenty years - in the first years the interest exceeds half of the payment.

Which payments to choose - annuity or differentiated

In terms of overpayment, differentiated payments will always be more profitable. Annuity lose precisely because with them the bank client first repays interest, and the amount of the principal debt decreases more slowly.

It is important to remember that financial gain is not the only thing worth paying attention to. In our examples, we are talking about a loan for a relatively small amount for just a year. The difference between the first and last payment is a little more than three thousand, but does not look dramatic.

But consider mortgage 2.5 million at 10% for a period of 10 years. The overpayment for differentiated payments will be 1.25 million, for annuity payments - 1.46 million. However, with differentiated payments in the first year, you will have to pay 39-41 thousand per month, which can be an overwhelming burden. Of course, over time, the load will decrease. But this moment still needs to be waited for. For example, the payment will decrease to 33 thousand only after 4 years. With annuity payments per month, you will always have to pay 33 thousand rubles. And it can be much more comfortable.

Therefore, if you take a loan for a large amount or for a long time, consider both options to understand what suits you.