Annuity payment

Annuity loan payment: what is it

Annuity payments are the most common loan repayment scheme. With an annuity, the borrower repays the debt to the bank in equal amounts every month throughout the loan term.

For the bank, this loan repayment scheme is the most preferable, since with this option the overpayment will be larger than with differentiated payments.

 

What an annuity payment consists of

An annuity payment includes the principal and interest for using the loan. If you study your payment schedule carefully, you will see that most of the first payments consist of interest. And closer to the end of the loan term, it is the principal. That is, at first, when paying money toward the loan, you repay interest first.

This scheme allows the bank to protect itself in case of early loan repayment — the organization will in any case receive its fee on the issued funds, precisely because the borrower first repays the interest portion of the debt.

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Example of annuity payments

As an example, let's consider a loan with the following terms:

• loan amount — 1,3 million RUB;
• term — 15 years;
• interest rate — 6,25% per annum.

For convenience, let's present the information in tables.

Table 1 — Start of payments.

Month and year	Payment, RUB	Interest, %	Principal, RUB	Remaining debt, RUB
December, 2021	11146	6678	4468	1295532
January, 2022	11146	6877	4269	1291263
February, 2022	11146	6854	4292	1286971
March, 2022	11146	6170	4976	1281996
April, 2022	11146	6805	4341	1277655
May, 2022	11146	6563	4583	1273072
June, 2022	11146	6758	4388	1268684
July, 2022	11146	6517	4629	1264055
August, 2022	11146	6710	4436	1259619
September, 2022	11146	6686	4460	1255159

 

Table 2 — End of payments

Month and year	Payment, RUB	Interest, %	Principal, RUB	Remaining debt, RUB
February, 2036	11146	573	10573	97616
March, 2036	11146	483	10663	86954
April, 2036	11146	460	10686	76268
May, 2036	11146	391	10755	65513
June, 2036	11146	347	10799	54714
July, 2036	11146	280	10866	43848
August, 2036	11146	232	10914	32934
September, 2036	11146	174	10972	21962
October, 2036	11146	113	11033	10929
November, 2036	11146	58	10929	0

 

As you can see from the table, the closer to the end of the loan, the larger the part of the payment goes toward repaying the principal. This cannot be said about the first payments, when more than half of the payment goes toward the interest portion. At the same time, the payment amount is always the same.

How annuity and differentiated payments differ

We have already figured out what an annuity is. Now, for clarity, let's explain what a differentiated scheme is. With it, the principal is distributed in equal parts throughout the loan term, and interest is charged on the remaining loan amount. Thus, the main debt burden falls on the first months of loan repayment.

Advantages and disadvantages of the annuity payment

To begin with, let us look at the advantages of an annuity payment for borrowers:

• thanks to the fact that the loan is repaid in equal amounts throughout the entire loan term, you will not get confused about your payments;
• with an annuity, the monthly payment amount is lower than it would be with a differentiated scheme.

Now let's move on to the disadvantages:

• due to the fact that the majority of the initial payments consist of interest, you will significantly overpay even with early loan repayment;
• precisely because of this payment structure, your overpayment on the loan will be higher than it would be in the case of a differentiated scheme.

Thus, the differentiated scheme is the most advantageous loan repayment method for the debtor. However, it is better for the bank when the borrower repays the debt in equal installments, thereby overpaying for the use of the money. Therefore, the debtor often cannot choose what the loan payment schedule will look like.

How to pay off a loan ahead of schedule

Overpayment on annuity loans is very high. Borrowers know this and therefore often try to close the debt to the bank early. This option is available in almost any bank regardless of what the loan was issued for.

With partial early repayment, the client can choose to either reduce the monthly payment or shorten the term of the loan agreement. In this case, we cannot recommend the option that would be more profitable and convenient for you. You must decide for yourself what is preferable—to reduce your debt load or close the loan ahead of schedule. We will only clarify that in the second case, the overpayment will be much lower than in the first.

Note.

Experts advise choosing to reduce the monthly payment, but making amounts equal to those before partial early repayment. This way you can close the loan earlier, and in case of financial difficulties, reduce your debt load.

Answering frequent questions

At the end of the article, we will answer the most common questions

In what case will the annuity scheme be more profitable than the differentiated one?

Differentiated payments will always be more profitable than an annuity. But if you took out a loan for a small amount and a short term, there will be no special difference for you between the schemes, since the overpayment will be practically the same.

Can I choose the payment scheme myself?

Currently, almost no banks give borrowers the right to independently choose a payment scheme. Many credit institutions issue annuity loans by default.

How do I know which scheme I have?

To do this, you just need to look at your payment schedule. If your loan payments are the same throughout the entire loan term, you have an annuity scheme. And if your payments are gradually decreasing, you have a differentiated scheme.

What payment scheme does Sberbank use?

All Sberbank loan programs use the annuity payment scheme.