April 24, 2019

Calculating French Amortization Schedule – Loan in Constant Installments

Loan in Constant Installments

Loan in Constant Installments

With the calculation of the “French-style” repayment plan , constant installments will be obtained, without any change in their amount for the entire duration of the loan. This type of calculation is performed to verify the sum that will have to be paid each time for the repayment of a loan obtained: the counting therefore applies to the installments of loans or mortgages. Regardless of the type of loan chosen, the installment consists of a share of capital to be repaid and an interest portion, formed by the part of interest to be recognized with that single payment. In the calculation of the installment therefore the interest rate is fundamental.

The peculiarity of the French calculation method is that the amount of the installments will always be the same for the entire duration of the loan. This type of amortization plan, compared to the classic one, is therefore called “in constant installments” . This result is obtained thanks to a particular count that concerns the composition of each installment. Given the composition between interest and capital, it changes over time, ensuring that the installment as a whole is constant.

Operation is less difficult than it may seem: initially, each installment is made up mostly of interest . This happens because at the beginning of the loan the total interest to be paid is much higher, since it is calculated on a high residual (we remind you that the interest rate is expressed by a percentage of the loaned capital). However, as advances are made with payments, the residue decreases and therefore the weight of interest also decreases with time. This decrease is compensated by a growth in the share of capital to be repaid with each individual installment. In this way, the payment amount remains constant.

This method of calculation has some important consequences. First of all, it guarantees stability and certainty to the user, who, at the time of signing the contract with the related amortization plan, knows precisely not only when he will pay the installments, but also how much each of them will amount to. Furthermore, in the case of classic loans, the calculation of the French amortization plan makes the early repayment of the loan more advantageous at the beginning of its duration: since the extinction blocks interest payments, it should be carried out at the beginning when the their share is particularly high.

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