The repayment installment of a loan is the portion of the monthly installment that corresponds to the return of the money received.
Each payment that the debtor must make is divided into two components: The reimbursement from the principal and the accrued interest.
It is useful to differentiate the interest amortization fee because only the latter correspond to financial expenses.
Amortization fee according to method
The fee varies according to the method used to prepare the amortization table, which is a table that chronologically details how the debtor will return the credit.
- French method:The amortization fee varies and is increasing. The formula used is as follows:
In this case, the monthly payment (including interest), is fixed in all periods.
- German method:The amortization fee is constant. Thus, only interest payable vary. These are decreasing and are calculated by multiplying the principal balance by the interest rate. The formula used is the one shown below:
- English method:There is only one amortization fee at the end of the indebtedness term. In each period, only accrued interest is canceled.
Example of amortization fee
Let’s look at an example to calculate the amortization fee. Assume that a loan of US $ 15,000 is granted with an interest rate of 3% per month and six installments. If the payments are every thirty days, the repayment schedule would be as follows:
- French method
- German method
- English method
Impact of the amortization fee
There is an impact on the size of the amortization fee. The larger it is in the first periods, the interest payable will decrease. This can be seen in the examples shown previously.
In conclusion, the debtor should return as much as possible of the principal in the first installments. In this way, financial expenses are reduced.
On the contrary, it is convenient for the lender, to some extent, for his client to delay in returning the money granted.