Amortization and types of repayment of loans | What are they?

When we have to advise clients on the interest they have on loans, we instruct them about the scope of these financial commitments and how to pay them without being a complicated matter. And actually, they always appreciate it.

However, the most important thing is to know the implications of taking out a loan. And, precisely, one of the details that must be mentioned is that there is the possibility of amortizing the capital owed . So we can gradually get rid of the obligation of financing.

Amortization and types of repayment of loans | What are they?
Amortization and types of repayment of loans | What are they?

What do we define by amortization?

It is not difficult to know that it is a financial process that allows us to gradually get rid of the debt incurred, through progressive and interleaved payments over time. In other words, we must interpret amortize as a periodic payment of the monetary amount that we have received .

Normally, an amortization process is carried out through progressive disbursements, which can be the same or different. However, depending on the terms in which the loan has been scheduled, a single payment could also be accepted, which would be a definitive amortization.

To clarify the issue a bit more, amortizing consists of paying part of the debt each month, usually married to a bank or financial institution. In the end, this process pursues the completion of the commitment in a comfortable way for the client, without feeling the pressure of a full payment with interest.

But what do we mean by a loan?

A loan is a financial operation by means of which a bank or financing entity places a certain amount of money in our favor, establishing a contract for it. The loan obliges the beneficiary to the following:

  • To return the amount issued in a previously agreed time.
  • Pay principal and interest.
  • Consign payments in monthly installments.
  • The capital borrowed is called principal and interest is the commission paid for using this benefit.
  • The stipulated time to pay the loan is called the term.
  • The lender is the one who lends the money.
  • The borrower is the one who receives it.

The most popular loans are mortgages and personal ones . However, there are others that also experience requests from the public, namely:

  • The personal ones : they finance very particular needs and of a small monetary amount: they serve for a trip, for example.
  • Mortgages : they are offered to the public under the guarantee of real estate, if the loan is not repaid, the bank is paid with the house.
  • Destined for consumption : they relate to consumer goods that are recognized as durable: a piece of furniture, an electrical appliance, a car, and others.
  • For study : they benefit students and are used to pay for undergraduate or graduate tuition.

In the financial system there are a set of modalities that work to interact with clients . They represent mechanisms that offer advantages and possibilities for borrowers to be able to pay off their commitments without incurring regrettable defaults.

Most popular types of amortization

In loan-based financial relationships there are several types of redemption. They propose different ways to pay the amount, the fees and the interest . The rule of thumb is that the lenders set the contract guidelines.

But let's look at the various types of amortization known so far:

  • French or constant installments: the payment of the principal is manifested constantly, what changes is the payment of interest. At first the payment is demanding, but later the amount decreases.
  • According to the American system : It consists of paying the interest on the capital, with the exception of the last installment in which the entire amount is paid. This formula allows you to pay interest and make deposits to pay off the principal debt.
  • Italian style : set a constant amount on the amount borrowed, which is reduced once the payment is issued. This modality according to the indicated procedure tends to reduce capital and interest on the debt.
  • Increasing installments: It is characterized by the progressive growth of installments, capital and interest vary.
  • Of decreasing quotas : It is based on a decrease in the quotas that is registered progressively.
  • Fixed with variable repayment term : the value of the installment is the same, but fluctuates according to the rates. If these go up, the period is prolonged. If rates fall, there is a reduction in the time available for maturity.

There are mortgage amortization calculators. In general, they work so that clients can view monthly payments that are made in favor of the principal and interest. They are called as amortization simulators.

In the case of mortgages, it must be recognized that what has been compromised has been the home, so you must proceed very responsibly and not fall into breach of the agreements .

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