Loan repayment, better to reduce installment or number of installments?

When a loan repayment, a capital that has been previously granted is returned. In general, installments are paid quarterly, monthly, etc., each of which will cover a part of the loan requested and interest generated.

When you want to proceed with a dynamic of repayment of debts resulting from previous loan applications to banks or financial institutions, it is common to wonder about the most efficient way or strategy to pay them off.

In these cases, decisions must be made based on reliable information and considering the previous experiences of other users. There will be advantages and disadvantages; pros and cons that will support or discredit a specific course of action under given circumstances.

We analyze and contrast in this text, a content that allows us to answer the question whether it will be better to reduce installments, or instead reduce the number of installments, in order to repay a loan.

Before commenting and focusing on this section, we will briefly discuss some points related to the issue of loan repayment.

Depending on the strategy chosen personally for the return, this amortization may be partial or total; always being the tendency to produce savings in the accounts of those who amortize. The interest generated will be of lesser amount, whether the amount or the term is reduced, considering the operation has not been neutralized by the early repayment fees of the loan.

The amortization of a loan will rarely be possible to develop at the beginning of it. You have to wait months or years to execute it, and this will depend on the conditions of the contract that was developed with the bank.

Each entity and line of credit will offer differentiated terms, which must be previously studied  in order to check whether it is possible to take advantage of the early repayment of the loan in question.

Forms of Financing the amortization of loans

French amortization It is one of the most common and simple forms of existing financing, which consists of paying a similar fee in all periods. There will be a quota and a date for the client, usually the same day of the month to make the reimbursement. The same type of payment will always be faced, which could be inconvenient in specific periods of the year or seasons where financial solvency is more adjusted. It is necessary to have sufficient liquidity to be able to meet the payment according to the date agreed in the loan contract.

Another possibility will be the increasing quota, a method where a reduced fee will be paid at the beginning, which will grow over time. Its most important advantage is that you can have a longer period to carry out or plan an effective payment strategy.

On the other hand, the decreasing installment translates into a higher payment variant at the beginning and less in the final stage. It is considered by many to be a non-ideal form of negotiation, although it is convenient under certain circumstances.

As the months go by, the fees are reduced and it is possible to manage finances with more freedom. It will be possible to have a loan amortization table, facilitating the knowledge of the amount of installments to plan the payments. It is advisable to have savings in order not to fail in the commitments of the first months.

Successful loan repayment

To be successful in the payoff maneuver bank debt without failing or failing in the agreed installments, the person who has applied for the loan has to plan his expenses and income accurately, being able then to know the financial operation margin that he has.

More important still is this action level if you have your own business. Otherwise, when you are a common employee or employed, you must specify and have control over the monthly salary to be able to cover the bank fees, and at the same time be able to manage personal accounts.

You are advised by experts to start an activity or expand an existing business when applying for a loan. If you have some time exercising some type of enterprise or activity, it is very possible that you will have data that manages to manage a correct expectation about the monthly benefits to be acquired, otherwise you will have to operate with more uncertainty.

If, after applying for a loan, the monthly benefits that are obtained manage to cover the agreed installments with ease, and the expectation of increasing the benefits with the investment are guaranteed with a good probabilistic sense, it can be considered an appropriate financial maneuver.

Loan repayment reducing installments and number of terms

After having obtained a loan and after some time has elapsed, the economic situation of the person who applied for the loan may change or improve in their favor for a variety of reasons, whether fortuitous or expected. In many cases the most reasonable position could be to return all or part of the requested money. In general, the interests that are applied from the bank will be reduced, this being just one of the primary motivations for developing amortization.

A question is imposed. Is it more convenient to reduce the monthly fee or pay the same amount as before but in a shorter period of time?

Considering these last two variables and depending on the need that is had at a given moment, moreover also taking into account the capital to be amortized, it must be assessed which of both options the interested individual has to avail himself of.

Before selecting the loan repayment strategy, it is necessary to know and study the conditions of the contract. This could contain a penalty if the amortization initiative is taken, named commission for early amortization. It cannot be exceeded from a stipulated percentage. For shorter periods of stay this percentage is usually reduced.

It is therefore vital to personally check how the savings are with the early amortization, this event related to a possible payment of the amortization commission. If it is a very small difference, it could be concluded that it is not worth executing an amortization in this way on the credit line.

What is always sought will be that this type of commission is not included, trying that the banking movement results in more profitability with greater savings. It is well known to recognize that the current bank offer allows credits excluding the commission for early repayment.

It is possible to calculate how the term or the repayment installment of a loan will vary when an advance payment is made, using partial loan repayment simulators, which perform the recalculation of the term or installment.

Amortization of loans with a decrease in the installment

This type of amortization is executed when a smaller amount of money is paid each month for the loan that was obtained, but maintaining a similar maturity period as the one agreed. It is an option considered favorable if the objective is to have a greater monthly relief regarding the repayment of the loan.

Consider the case where a person has been granted a loan of 10.000 euros over 5 years, where the interest will be at 10%. If that person considers that his financial situation has a greater predisposition to the reduction of the quota, a strategy with the same permanence would be maintained, although recalculating the monthly quota. In this way, the monthly fee that will have to be paid will be falling from € 212.47 to € 191.22. When the loan ends, a total amount of € 11.473 will be returned. In a practical way, interest will be reduced by € 788.

Loan repayment reducing the term and maintaining the installment

In such a case, a similar quota would be maintained, but the months to formalize the financial operation will be reduced.. Let's think that you choose to keep the fee of € 212.47, in this way you will be paying for a period of time of 53 months; instead of the initial 60 months that was supposed to. Thus, the loan obligation will finally be € 12.261.

In a concrete example like this, the reduction of the fee is considered a more advantageous proposal in view of paying less money.

It is advisable to request the complete amortization table from the financial institution in question that is being used, and carry out simulations, to know with more approximation and certainty if in a particular case it will be more advantageous to amortize in advance in term or in installment.  

Term Vs. Quota Which one to choose?

When the intention is to save to the maximum of the existing possibilities, the most profitable thing is to proceed with the reduction of terms. In such a case, the interest will be generated in a shorter time.

For those who face circumstances or scenarios where assuming the monthly fee tends to be complicated, reducing this is the most coherent model of action.. If the loan had a variable interest, and we have indications that it will probably increase, it is a suggestive option to project in the decrease of the quota while maintaining the term. This will prevent the fee from becoming more expensive.

Reducing the term will be the way to save more money, since time is usually the factor that will cause interest to increase.