Amortization plan: what will it be? We are talking about the debt repayment program. All the features of the contracted loan are contained in the plan, which contains all the information you need to know about how to repay the capital granted by a credit institution.
Among the four types of amortization plan, one is the French one, which by the way is the most requested in our country. But what exactly does it consist of and under what circumstances is it convenient? Stay with us until the end of the article and find out if this model is right for you.
What characterizes the French repayment plan?
The distinctive feature of the French repayment plan is that it is a constant installment instrument with delayed repayment. This means that the amount of the installment will remain fixed for the duration of the loan agreement. However, pay attention to variable rate loans. In this case, in fact, the installment would be subject to fluctuations that do not depend on the amortization plan, but on changes in the financial market.
For ease of things, in this article we will take as an example a fixed-rate loan with a French repayment plan. The installment, which remains unchanged, is composed of two elements.
- The principal amount: the periodic repayment of the financed capital.
- The interest rate: the compensation that the borrower pays to each balance for the capital received.
With a debt decreasing from time to time, the interest portion will be calculated on an increasingly smaller amount. If the installment is constant, the interest rate will be higher at the beginning of the loan, as opposed to the principal amount. This means that the borrower is initially committed to the balance of the interest, to then pay the part relating to the actual capital. We are therefore faced with a loan with decreasing interest rates and increasing capital quotas .
How does it work exactly?
In light of what has been specified, if we add up the capital amounts of the amortization plan, we will obtain the amount requested as a loan. On the other hand, adding all the interest amounts we will get the overall share of the interest to be paid.
The residual capital, or the debt that remains from time to time to be paid, decreases with each repayment. The interest is calculated precisely on this residual capital. It is therefore evident why the interest rate decreases progressively. To construct a French plan we will proceed to the following fundamental calculations :
- Calculation for each period of the interest rate, given by the residual capital of the previous period multiplied by the interest rate referred to said period.
- Calculation of the principal amount, given by the constant rate to which the interest portion is subtracted.
- Calculation of the residual capital, given by the residual capital of the previous period minus the principal amount of the current period.
Advantages and disadvantages of the French repayment schedule
To find out who is in favor of such an amortization plan it is necessary to analyze its advantages and disadvantages. By clarifying that no debt relief program can be considered an ideal model, here are some clear details to guide you to an informed choice.
The constancy of the installment means that the plan can be easily programmed from the beginning. The borrower is aware of the amount to be paid, which will remain fixed.
Since the interest rate has less and less influence on the composition of the installment, as repayments are advanced, it becomes less and less convenient to provide for the early repayment of the capital . Why never? Because with the first installments most of the interest will have been paid. As a result, the bank will have already cashed in its earnings and the borrower will be disadvantaged.
With pros on one side and against the other, we can say that the convenience or less of depreciation will depend on the borrower. In fact, the key factor to consider is the economic resources and the consequent sustainability of the financing since the first installment.