In redemption the debtor gives the lender (financial institution) a refund of the money granted by the latter within an agreed period and interest rate (fixed or variable) previously agreed.
The three most important factors for amortization process are…
- The amount of the loan or debt
- The interest rate
- The deadline for paying the debt
Since all three elements are interrelated, contemplating a loan should be taken into account that the higher the repayment period, the more interest you pay on its debt. However, larger repayment term, lower subscription costs to be borne.
Thus, the term is determined largely by the amount of money you are willing to spend on your debt each month. Also, it considers that the repayment terms vary according to the type of interest: fixed rate operations tend to be shorter than variable rate of interest repayment.
Taking into account the three factors mentioned above, depreciation can be classified into…
- Constant amortization fee or French method: It is the most common form of loan repayment. It is always the same fee paid. The money is distributed by periods between the interests and amortized capital. That is, although the fee is always the same, interest is calculated on the outstanding amortized value; So, part of your payment that goes to interest is reduced in proportion to the amortization of capital as of the outstanding capital will be lower. The result of this system is that during the first phase, compost is primarily concerned with the interests, but as they are paying fees, the part thereof corresponding to retired capital increases, which results in a gradual decrease interests. This type of repayment is more convenient for people on fixed incomes, and that while the cancellation of the capital will be significant from the middle of the plan, ensures a constant share throughout the life of the loan term.
- Amortization of growing share or American method: In this kind of share redemption will increase over time. The first payments are small, which is advantageous for borrowers who expect an increase in revenue, however, as a logical consequence; the last payments will be considerably higher. The type of redemption “American” can benefit those who need to pay fees low for a period of time (to have a future debt to be liquidated prior, for example) and can subsequently make larger payments.
- Amortization or German method falling rate: This type of loan repayment is contrary to American. Its use is rare despite having the advantage of paying less total interest. With this method the amount of debt written off is always the same, so that the liability decreases rapidly from month to month and with it, the interest generated. This amortization German system is recommended for people with income and expenses variables at any given time have the possibility of prepayments, as quotas are decreasing (fixed capital + interest on balance).
Using the amortization in its favor?
Choose a type suitable repayment to the individual needs of each person helps to better manage resources and optimize the payment of debts. It is important to assess the possibilities and to consult a financial adviser to help decide what kind of repayment is the most convenient for you.
The most convenient type of repayment will depend on each individual case. The applicant must evaluate their past, current and expected revenues. Financial institutions suggest that the monthly payments are not higher than 40% of net income customer since otherwise the payment may be compromised.
Also, as with all future plans, to plan the most suitable type of depreciation must consider the purpose of your debt (if it is to buy a house that will last many years, a car, or other technology).