Types of Depreciation of Bank Credit
The amortization or repayment of a bank loan can take several forms. Generally, the payment schedule is monthly. The different types of depreciation are:
Reimbursement monthly installments, or gradual repayment of capital: the monthly payments are always the same, but initially they have a majority interest, and at the end a majority share capital;
The monthly reimbursement decreasing, or constant repayment of the capital: every month, the same amount of capital is repaid, which means that the monthly amount of interest associated with decreases in time;
Repayment at the end: you only pay the monthly interest, and repay all the capital at the end of the credit.
It is possible to mix the solutions, and in particular to have a grace: for the first time, you pay only the interest and principal is due entirely, then a second step we gradually repay the capital, with always interests but decreasing.
The ultimate redemption is generally not recommended for individuals. It can be used only in rare cases (balloon loans if you change cars regularly, home loans only in case of a rental investment to speculative), if one has enough financial reserves to fund the discount goods purchased on credit.
The credit agreement
All credit is subject primarily to an agreement on the part of the lending structure.
The credit is based on a relationship of trust, however, assessed using accounting methods.
The more lenders will trust the borrower, the more important will be the amount loaned and the interest rate low. This applies to the reverse situation.
The credit agreement is based on methods of risk assessment. This is to give a note to the repayment capacity of the borrower. Are included in this calculation: income, debt ratio, age …
All credits are accompanied by interest payments, that is to say that the borrower pays a sum of money in addition to the initial amount borrowed.
The interest is justified by:
the risk taken by the lender: in case of default, interest used to cover losses;
inflation causes a devaluation of the currency: the interest used to recover the money originally paid;
the fact that the banking business needs to pay for its lending practice.
The interest rate is always between two rates: a minimum, the reference rate of the central bank, and a maximum rate, the wear rate, legally fixed by the Bank of France.
The interest rate of bank credit may be:
a fixed rate determined at the beginning of the contract and valid for the duration of the loan;
a variable rate indexed to a benchmark rate (usually the Euribor, Euro Interbank Offered Rate, which is the money rate charged among banks in the euro area, 3 or 12 months;
an adjustable rate: this is usually a variable rate but with limitations (capped rate, that is to say, with a ceiling and floor), so that the interest rate drift to levels where borrower no longer creditworthy.
When the loan is floating or adjustable rate, the impact of rate change is done by modifying the amount of the monthly payment or the repayment period.
In the case of a floating or adjustable rate, it is very important to understand:
how the rate is revised (and especially if the base rate is well below the Euribor, in which case it will always be revised after the purchase of credit);
how the review affects;
and whether control mechanisms are real and not illusory (eg, the length with a maximum, but allowing for a revision of the monthly payments if the maximum is reached …).
It is not advisable for an individual to purchase a variable rate credit. A credit is capped adjustable rate possible, but it remains to avoid for the medium-term loans, and credit for banishing the very long term, because nobody can predict changes in rates beyond a few years.