Repayment of loans can be carried out in equal parts (annuities) or by reducing contributions, and these two options are provided for by the legislation on consumer lending, but not by the legislation on mortgage lending.

Customers can choose the repayment method and possibly change the payment method during the development of the credit agreement.

The payment of higher interest at the beginning of the credit period is practiced worldwide in accordance with the universally established legal principle that interest is charged on the amount of the credit balance that is apparently higher at the beginning of the credit period. period.

Consumer credit

In the case of consumer loans, the differences between the two legally practiced banks in repayment methods are not so noticeable.

Studying the problem

Thus, for a consumer loan of 20,000 lei obtained over 60 months with an interest rate of 12.64%, repayment in equal parts (annuities) would mean an equal rate of 451 lei, of which the principal amount is 241 lei and the interest is 211 lei at the first repaid contribution. In the case of a consumer loan of similar value, duration and interest, with repayment by reducing installments, this would mean an unequal first installment of 544 lei, of which 333 lei of principal and 211 lei of interest.

In the given example, the client can claim a higher amount in case of repayment of the loan in equal parts (annuity), while the monthly contribution will initially be smaller. On the other hand, the total amount of the loan payment by repayment in equal parts (annuity) would be higher by 658 lei compared to repayment by reducing contributions.

Mortgage loan

In accordance with the legislation, the consumer receives, upon request, a free of charge for the entire term of the credit agreement, an amortization/repayment table, as well as a copy of the credit agreement. Thus, from the moment the loan is granted, the consumer knows the method of repayment of the loan and the share of the principal amount and interest in the monthly rate.

Studying the problem

For a mortgage loan in the amount of 200,000 lei obtained in 2018 for a period of 300 months, with an interest rate of 4.71%, repayment by the method of equal installments (annuities) meant an equal rate of 1,136 lei throughout the loan period, of which the interest for the first month was b 785 lei, and the main amount – 351 lei.

In the case of a mortgage loan of similar value, duration and interest, with repayment by reducing installments, this meant an unequal first installment of 1,452 lei, of which the principal amount is 667 lei and the interest is 785 lei. The first rate would be 27% higher for a loan with reduced credit, meaning some customers might not qualify for the amount they applied for, or would receive a lower amount and have to make a larger down payment. The total difference in payment between the two methods is, in the presented case, approximately 22,549 lei, 7% more for the method of equal payments (annuities). The total amount of the payment depends on the change in interest rates.

Some customers choose to pay in equal installments (annuities) to get the loan they want, make a lower down payment, and have a lighter burden on their first mortgage payment so they have the financial resources to upgrade/improve their home.

Comparative analysis of two methods

Mortgage repayment in equal parts (annuities)

Advantages

• Greater chances of getting the desired loan for the purchase of real estate thanks to a lower rate;

• Contribution with a smaller advance at the time of loan processing;

• Financial resources for direct costs of modernizing/furnishing the house.

drawback

• Larger total payment amount.

Repayment of the mortgage loan by reducing contributions

Advantages:

• Smaller total payment amount.

• Financial costs in the case of early repayment are lower due to faster principal repayment.

Disadvantages:

• The risk of not getting the desired loan for the purchase of real estate;

• Contribution with a larger advance for concluding a loan;

• Financial resources for immediate costs of modernization/decoration of the house may be less.

Customers are encouraged to analyze their creditworthiness and repayment method in order to choose the best option. As for the difference in calculation between the two repayment methods, the principal amount of the monthly payment is calculated differently.

In the case of repayment with decreasing installments, the principal amount is obtained by dividing the amount received by the client by the number of credit months, while in the case of repayment in equal installments, the monthly principal amount is determined according to the calculated amount of interest, so that the installments are the same throughout the crediting period.

Monthly interest is calculated the same in both methods by applying interest to the balance.