Repayment loan – construction financing with decreasing installment payments

An amortizing loan is paid back by the borrower in monthly installments. There is a fixed repayment amount for the entire term. As the interest charge decreases over the course of repayment, the monthly installment decreases. In this article you will learn how an amortizing loan works, what to look for in this type of loan and for whom the loan form is suitable.

What is an amortizing loan?

The amortizing loan is also called an installment loan. During the entire term, a fixed repayment rate applies, which reduces the remaining debt month by month. Interest is always calculated on the remaining debt amount, so that the monthly interest payments continue to decrease over time. Since the installment is composed of an interest and a redemption portion, the monthly burden becomes smaller. While the loan rate is very high at the beginning of the term, it decreases steadily over time.

How does an amortizing loan work?

When you take out the loan, you agree on a fixed repayment that reduces the remaining debt each month. To this must be added the interest rate charged by the bank for providing the loan. Usually you receive an amortization schedule, which shows the development of the loan.

The following example illustrates how banks calculate the amortizing loan:

We consider a loan for 200.000 euro to be repaid over 20 years. The interest rate is 2 percent, and the monthly repayment rate is €833.34 or. 10.000 per year:

Month	residual debt	interest	redemption	rate
1.	200.000 €	333,33 €	833,33 €	1.166,66 €
2.	199.166,67 €	331,95 €	833,33 €	1.165,29 €
12.	190.833,33 €	318,05 €	833,33 €	1.151,38€
after expiration of 1. Annual	190.000 €	316,67 €	833,33 €	1.150 €
after 10 years	100.000 €	166,67 €	833,33 €	1.000 €
after 15 years	50.000 €	83,33 €	833,33 €	916,66 €
after 20 years	833,33 €	0 €	833,33 €	833,33 €

The example shows the monthly decreasing charge due to the reduced interest portion.

Tip: you can take out the amortizing loan with a fixed interest rate or opt for a variable interest rate. Especially in times of low capital market interest rates, a long-term fixed interest rate is worthwhile. This will also ensure perfect financial predictability, as you will know exactly what charge you should expect until full repayment is made.

What are the differences between amortization loans and annuity loans?

While in the case of an amortizing loan the monthly installment decreases, in the case of an annuity loan the burden remains the same until the end of the term. With an annuity loan, the interest burden also decreases as the remaining debt decreases, but this savings goes toward repayment.

You have repaid an amortizing loan more quickly than an annuity loan due to the constant repayment share.

What are the advantages and disadvantages of the amortizing loan??

When you opt for an installment loan, it comes with several benefits: