How is the amortization schedule calculated when a loan is requested? But above all, what exactly is an amortization plan? Here we offer a definition and clear explanations on how to proceed with the calculation if you intend to apply for a loan.
What is the amortization plan? A repayment plan is also given and all the methods and times for repaying the loan, as well as the composition of the loan installments are specified.
How to deal with the repayment plan
Having in mind the amortization plan that is most suitable for what you can afford, is ideal even before making the loan request itself.
Before signing the loan request it is essential to have a clear picture of the situation, in particular you need to know by eye, even the amount of the maximum installment you want to pay.
The repayment plan contains all the information and timeframes that the bank requires for the purpose of disbursing the loan in the form of the amount you requested.
If you have tried to apply for a loan in the past you will know that fortunately the credit market offers many variations in its offer of amortization plans and this is good if you need to apply for a loan.
Now let’s get to the subject more in depth to allow you to understand how to calculate your amortization schedule.
Definition of the amortization schedule
When you ask for a loan soon your credit institution will present you with a proposal for a debt repayment plan that will bring up its extinction.
In general, the bank or the financial company is willing to negotiate with the customer on the ideal methods for him to return, so that problems of non-payment will never arise.
In the plan it goes to establish:
- The duration of the plan
- The percentage of interest
- The amount of the individual installments
Each repayment installment will have included in itself a principal amount representing the money lent by the bank and then a share of interest or the amount of interest applied to the loan.
Starting from the amortization plan, the composition of the repayment installments can be changed. From the moment the contract is signed, you are obliged to respect the terms of the contract to return the loan.
Very often the loans are flexible and customizable as many institutions allow access to changes in the installment, consequently changing the duration of the loan.
The shorter a loan is the greater the installment to be paid at the end of the month. Longer repayment plans instead allow access to smaller installments.
Before agreeing the loan and the repayment plan with the bank it is wise to proceed with an assessment of your financial situation to understand what kind of installment you can afford.
Another important variable that affects the amount of an installment is the type of interest rate agreed with the bank. There are two types, fixed or variable.
The fixed rate gives the certainty that the interest to be paid does not vary for the duration of the contract, vice versa the variable rate may undergo changes during the course of the loan.
Types of amortization schedules
There are different types of amortization plans, in Italy in most cases French depreciation is used. It is a program to get rid of debt where in a first phase the installment is mainly composed of the share of interest, then it will leave space to the capital quota.
This means that in the final phase of the loan, the principal amount will represent most of the amount due. But it is good to remember that the amount to be repaid monthly will always remain the same. What changes is only the internal value of the quota.
We say that in principle this solution serves to guarantee the creditor that interest is returned first and after the principal amount that represents the liquidity disbursed.
There are other types of depreciation plans such as:
- Floating rate plans: as already anticipated, these plans provide that the interest rate may rise or even fall. It can also vary only the amount of interest due, while the principal remains based on the original rate.
- Plan in increasing or decreasing installments: in this case one chooses whether to have installments that rise or fall over time.
- Free plan: while the interest remains fixed, the principal can be returned freely, but always within a certain deadline.
To find the most ideal solution to your needs, it will be good to ask your credit institution for advice.