When a loan is accessed, such as the opening of a mortgage for the purchase of a house, the credit institution establishes an amortization plan with the debtor, ie a document describing the loan repayment terms.
The loan amortization plan defines in detail in detail the total duration of the loan, the number of installments into which the sum to be repaid is divided, the amount of each installment with the relative maturity and the amount of the residual capital after each payment.
The individual installments of a repayment plan for a loan consist of two installments; the principal amount is given precisely by the distribution of the loaned capital for the number of installments, while the interest portion consists in the distribution of the interest rate applied to the loan over the entire duration of the amortization. The two amounts that make up the amount of each installment are calculated differently depending on the depreciation plan chosen.
Let’s see what the main types are.
Depreciation plan types
The most widespread amortization plan currently is the ‘French’ one , and is characterized by constant-rate installments for the entire duration of the loan (if the loan is at a variable rate, the amount of the installment may change, but it remains sustainable for the consumer).
What varies in this type of amortization is the composition of the shares that make up the individual installments. In fact, the value of the interest portion in the repayments amount is greater in the initial repayment period, and is progressively reduced during the loan amortization, while the value of the principal repaid at each installment increases in parallel.
In this way the banks are repaid more quickly the interest applied to the loan and subsequently the capital loaned.
In the ‘Italian-style’ amortization plan, on the other hand, the principal repaid with each installment is constant, while the interest share, calculated on the total amount of the residual capital, gradually decreases.
In fact, at the due date the interest to be paid is calculated on the total amount of the remaining capital, and since this is reduced from time to time, the interest to be paid will always be lower.
For this reason, in an Italian amortization plan the amount of the individual installments decreases over the course of time . In addition to these types, there is also a free amortization plan , which can be convenient for those who have discontinued entries during the year (such as seasonal workers).
In this case, the regular installments only concern the portion of interest, while the principal amount can be repaid when the debtor has the availability, even if within time windows established when the credit agreement is stipulated.
Fixed rate or variable rate in the mortgage repayment plan
Another data that affects the amortization plan is the type of interest rate applied to the loan.
We can find this variable in mortgage loans.
The amortization plan of a fixed-rate loan provides that the value of the interest portion is set at the time the contract is signed with the credit institution and remains constant for the entire duration of the amortization, regardless of market fluctuations.
The variable rate amortization plan instead provides that the value of the interest share changes according to the value of the indexing parameters established in the credit agreement.
The interest rate is therefore recalculated periodically at each rate change and may increase or decrease depending on market trends.
Generally a fixed interest rate is more expensive than a variable rate, but since it remains constant, it has the advantage of not reserving surprises for the consumer, especially in a long-term amortization plan.
A variable rate, on the other hand, may be cheaper if the duration of the amortization does not exceed 15 years.
A final consideration on choosing a loan amortization plan is its duration. As you can easily imagine, opting for a long-term plan, the consumer will support the payment of a large number of reduced installments, while a short-term plan will allow him to repay the loan through a lower number of installments, but for a larger amount high.
Therefore, if a long-term plan allows you to have ‘light’ monthly installments, it must be remembered that the overall interest paid in the long term will be greater than a depreciation plan more quickly.