Whenever you go to the bank to take out a loan or a loan, it is very important that the client has a clear vision of what the repayment plan foresees, also known as amortization plan. The latter consists of a debt repayment installment program, which breaks down into principal and interest, as well as specifying the residual capital due after each payment.
WHAT IS THE DEPRECIATION PLAN?
The video below allows us to shed light on the amortization plan, in particular we provide a definition of what the repayment plan is as it is intended by the banks.
WHAT IS THE DEPRECIATION PLAN REQUIRED?
The amortization plan is drawn up at the time of the subscription of the loan and is a very important document that allows the borrower to know what the conditions are, such as the deadlines and the amount of the installments, which are the payments to be respected and which and the residual debt.
The debt must be paid monthly (in some cases even quarterly or semi-annually) and the amount is debited to the current account indicated by the applicant; this sum includes several sub-items, including the following:
- the principal amount, ie the amount of the loan repaid;
- the interest portion, ie the interest accrued for the period of time considered.
After each payment, the amount of the residual debt is reduced by the portion relating to the principal amount, while the interest accrued, in the case of a mortgage loan, may be used at the time of the tax return, in order to benefit from the deduction on interest for the first home.
The following video allows you to specify not only the various types of depreciation, but also the features and constituent elements.
HOW MANY TYPES OF DEPRECIATION PLAN EXIST?
Before subscribing to a loan or mortgage, it is also important to understand which type of amortization plan is applied. For example, if the chosen loan had a variable rate, the amortization plan would only play an indicative role, as the interest rate would be subject to continuous changes, therefore also the installments.
There are different types of amortization plans, distinguished by the composition of the installments. In Italy, the most widespread amortization plan is that repaid to the French : in this case the installment consists of an increasing share of capital and a decreasing interest rate. In practice, at the beginning of the repayment program, interest is mainly paid and the capital is gradually repaid, the amount of the latter decreases resulting in an increase in the principal amount.
The amortization plan with Italian repayment is characterized by constant principal installments: in fact, this reimbursement requires each depreciation charge to be constant and paid in arrears.
The amortization plan with deferred installments consists of paying the installments at the end of the reference period, thus becoming relative to the previous period.
Instead, in the amortization plan with advance installments, payment is made at the beginning of each reference period.
There is another type of amortization plan, rather particular, called American. This repayment consists of a repayment program with two-rate accumulation installments and requires the debtor to repay the sum disbursed with annual and constant payments (ie accumulation shares) within a predetermined number of years.
In this case there are two interest rates: the technical rate of remuneration and the rate for the operation of capital formation. The first is linked to the execution of the global repayment transaction with periodic interests and the establishment of a capital, the second serves to capitalize the shares.
In any case, the American amortization plan is not widely used in Italy.
The German amortization plan resembles the French one for some characteristics, as it provides for constant installments and exclusion of the first. In this program, the interest rate is paid in advance, while the principal is paid in arrears. The initial installment that must be repaid immediately immediately after the signing of the loan contract consists of only interest and has a lower amount than the subsequent ones, which instead are constant and in which the capital and principal is included, always paid in advance in respect of at the maturation period.
One of the most complex amortization plans is that of offset financing. This amortization plan is associated with a current account which provides for the deduction of the balance from the residual capital on which interest is calculated.
To clarify the idea regarding this latter type of amortization plan, reference is made to an example taken from the prestitionline.it website.
If you have a loan with residual capital of $ 70,000 and you have the possibility of $ 20,000 in the current account associated with the loan, the interest would be calculated on the residual capital net of availability in the account, then on a residual capital of $ 50,000.
WHAT ARE THE CHARACTERISTICS OF THE DEPRECIATION PLAN? FOCUS ON PRE-AMOUNTING
All types of amortization plan provide for common features, first of all the initial period, called pre-amortization, during which interest is not repaid and not capital.
The same interest rate as the actual loan is applied to the pre-amortization period; this rate is added to the depreciation and from this derives a slight increase in the total repayment duration.
The duration of the pre-amortization varies from institution to institution and depends on the internal mechanisms of supplying the money.