How to calculate the annual percentage

The amount of interest paid by the Borrower to the Bank for using credit funds can vary significantly, depending on the method of repayment of debt. Only by correctly calculating the annual percentage and objectively appreciating its financial perspectives, you can choose the optimal form of cooperation with the bank. Many banks provide the borrower to choose the loan repayment form. This may be an annuity or differentiated payments.

The real annual percentage does not always correspond to the stated bank, so it is desirable to calculate it until the contract is concluded. The amount of funds provided, which is the body of the loan, it is necessary to subtract from the total amount to pay. The return amount is indicated in the payment schedule, which is a mandatory application to the loan agreement. This difference should also include different kinds of hidden commissions - payment for the service of the loan, for the removal and issuance of credit funds, possibly insurance payments. The resulting result is divided by the number of months of use of the loan, then we divide the total amount of the loan issued and multiply by 12.

Annuity provides for payments to equal parts over the term of the loan agreement. At the same time, the ratio of the amount of the body of the loan and percent is gradually changing towards an increase in the first component. Thus, at the very beginning of the credit period, the main part of the annuity payment will be precisely interest, and the body will be reached by small parts. Since monthly percentages are accrued to the debt balance, it is obvious that the real annual percentage will be much higher than the stated. This lending form is traditionally used by banks for small consumer loans, as well as car loans.

When choosing a differentiated form of repayment on equal parts, only the loan body is divided, monthly interest is charged to the balance of debt. The first payments will be high, gradually decreasing due to the intensive payout of the principal debt, and therefore a significant decrease in interest on its residue.

It is obvious that the differentiated scheme is more beneficial than the annuity, but only suits borrowers who have a financial opportunity to pay overestimated initial payments. It is ideal for large long-term loans.

Banks are interested in an annuity scheme of cooperation as more efficient to them. Therefore, before the conclusion of the contract, it will be advisable to demand from the bank employees the calculation of alternative ways to repay the loan and make a decision that thoroughly analyzing the value of the annual percentage of each of them.