Annuity Loans – What is it and how does it work?

An annuity loan is different from other types of loan, since with an annuity loan you always pay an equal amount at each payment until the entire loan is paid and ready. The amount you pay each time is fixed and contains both the repayment (installment on the loan itself) and interest costs.

Annuity loans

Annuity loans

When you pay in this way, it means that the size of the repayment and interest expense will vary over time. In the beginning you mainly pay interest while the amortization is small and when the loan becomes smaller then the interest cost will also be lower and then the amortization becomes a larger part of the cost. Now it should be said that the repayment can be greater than the interest rate even from the beginning, it depends on how much money you have borrowed, what interest rate it is and during how long you have to repay the loan on.

Loan repayment

Loan repayment

When you take out a loan with straight repayment, which is the alternative to taking out an annuity loan, you will constantly reduce your debt at the same rate (as long as you pay off just as much each payment opportunity). When you take out an annuity loan, your debt does not decrease linearly in the same way because you pay off quite a bit of the loan itself in the beginning and then above all pay the interest and then later pay off a larger part of the loan and only a little in interest.

The result is that your loan decreases slowly in the beginning, but then decreases considerably more quickly. This can usually mean that the total interest cost for an annuity loan will be a little higher than for a loan that is repaid with straight amortization. However, for loans taken over a shorter period, the difference is quite small.

Since an annuity loan has a fixed cost, you can only count on the cost of this type of loan exactly if you are running on a fixed interest rate and have a fixed term on the loan. In order to work out how much you have to pay at each time, these two variables must be determined right from the start.

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