Annuity Loan – What Is It And How Does It Work?
Most loans issued in the form of blank loans are annuity loans, and it is also the majority of the blank loans (private loans) that we offer. An annuity loan means that the borrower pays the same monthly cost each month until the loan has been fully paid.
This is best illustrated by the graph below. At the far left of the x-axis (time) the ratio of interest / amortization is shown when the borrower has just taken the loan. At the far right of the x-axis is shown the last month when the loan is paid off.
For each month one pays off the loan
The loan amount and thus the interest rate to be paid decreases, and for each month the rate of amortization increases as the annuity (monthly cost) remains the same.
The monthly cost / annuity (“amount” in the graph above) is determined by mainly three factors:
– The loan amount (the higher the loan amount, the higher the annuity)
– Interest (the higher the interest rate, the higher the annuity)
– Repayment period (the longer the period, the lower the annuity)
In the table below we have tried to illustrate this. The left side of the table shows how the interest rate is recorded on different amounts assumed the same repayment period. The higher side shows how the repayment period records at different amounts assumed the same interest rate. The red marked are the following example: A loan of SEK 100,000 would cost about SEK 1136 per month if you assume 6.5% interest and a repayment period of 10 years. A loan of SEK 25,000 would cost about SEK 238 per month if you assume 5.5% interest and a repayment period of 12 years.
How interest and repayment time affects the annuity.
Since this is not always so easy for someone who is not familiar with how annuity loans work, you are welcome to call us and you will receive free help from our loan advisor with how a loan may appear.