What is repayment of loans? What does interest, APR, all repayable mean? What maturity is worth choosing?
Many people think that you need to pay off the loan at the beginning of the loan and then only repay the principal. This is especially true when they take out a grace loan, so they only pay interest during the first 10 years of the loan. There is some truth to this idea, but only a small part.
When do I have to repay my loan interest?
Because the bank basically thinks that for the most common annuity loans (with the same installment installments), you have to pay the loan interest on the current debt every month, and the rest of the installment decreases the capital. Knowing this, it is easy to see that during the loan repayment, the interest burden is dominant at the beginning of the term in proportion to the repayment installment, and over time the principal repayment takes over. But let’s see this in a graphical illustration, where I show the rate of interest and principal repayment within the installment over the life of the loan.
In the light of maturity, the rate of loan repayment is slower than time passes. In the case of an 8% loan, only 35.5% of the principal is repaid up to 50% of the maturity.
There is also a credit product that periodically reduces the amount of the loan, but this is more common in the corporate segment.
What is the difference between interest, APR and total repayments?
I have repeatedly encountered the idea that if the interest is 4%, then on a loan of HUF 10 million, the surplus is to be repaid in total, regardless of the maturity. However, this is fundamentally incorrect, the bank looks at the current capital debt each month and claims 1 / 12th of the current annual interest, and the rest can be used to pay the capital. What you are earning in this case is the total amount to be repaid in proportion to the amount you have withdrawn.
It is not legally required to include such an index in your loan offerings, but I will calculate it in the following table. This value appears to increase significantly with increasing maturity. APR is so much more than interest that, based on a 5-year statutory term, it shows what the average annual loan rate would be in%. This indicator is basically a good point of reference when it comes to comparing different investment or credit options in its parameters.
How can I reduce the total repayment of my loan?
Low interest rates : It’s a good idea to choose the lowest interest rate path for the loan products available for that purpose. For renovation, most banks only have free-access loans available, but some banks have more favorable rates for housing loans, which can even include home savings. Similarly, installing a solar panel should be financed by an interest-free tender loan, rather than a free use loan or a personal loan.
Grants: Be it government grants, municipal grants, employer grants, CSOK, subsidized loans, health fund subsidies, a HUF 1 million debt reduction in case of the birth of a third or third child, or home savings; a combination of these can significantly reduce the total amount repayable.
Short maturity : It has already been shown that if the loan is repaid earlier, the bank will have to pay the interest rate for a shorter period of time and thus lower the total amount to be repaid. Of course, it is always possible to prepay a loan, this is guaranteed by law! And a good source of finance can be the use / leasing of a loan-financed property to shorten the maturity.
When is it rational to choose a long maturity?
From a purely financial point of view, it may be worthwhile to choose a long term maturity – for example, by combining home savings, we can keep APR low and achieve higher returns on alternative investments (such as stocks, home-based businesses, or whatever). For example, someone may want to supplement their future pension, and here the term does not matter, only that the installment payment does not exceed the monthly rent.
In such cases, the term will be long, but in the end there will be a property free of charge, which will be leased and the safety of retirement years will be reached. It is often the case that the goal is not to achieve a shorter maturity with a defined amount of repayment installments and other conditions.
Even then, we often find a safe and economical solution. Instead of subletting: I often come across a situation where someone has realized that paying rent is not a good investment in the long run. Even so, you often find that even with your current income and life situation, it is worth borrowing for a longer term to purchase your own property.