The annuity loan

Customers can take out loans from banks and insurance companies for a wide variety of purchases. A common reason for taking out a loan is real estate financing. This is a long-term financing that is repaid over up to 30 years. Hardly any customer thinks about the type of loan offered before taking it out. However, there are major differences between the different types of loans. Basically, a distinction can be made between installment loans, fixed loans and annuity loans. The annuity loan is the most common type of loan in germany.

But even classic purchase loans are often annuity loans. We explain in the following article what exactly an annuity loan is. In addition, we go into the mode of operation as well as the advantages and disadvantages of this form of loan.

What is an annuity loan?

The annuity loan is basically an ordinary loan. Consumers take out this loan and repay it in installments. In most cases, a monthly installment is paid for an annuity loan. However, the installment can also be paid quarterly or annually. The installment to be paid is called annuity. The word "annuity" is derived from the latin word "annus" and means "year". Borrowers pay back every year the same sum as annuity.

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A special feature of the annuity loan is that the loan installment does not decrease. The agreed repayment rate remains the same until the loan is repaid in full. An exception to this is real estate financing with a fixed interest rate period of. When the fixed interest period has expired, the annuity can be renegotiated with the bank. If a forward loan is concluded, the annuity can also be changed at the end of the fixed-interest period.

With the forward loan, borrowers can secure the interest rate today for a specific time in the future. At the same time, the annuity to be paid is agreed and contractually fixed. Thus, the annuity loan is an interest rate hedging instrument and helps to save interest and reduce the cost of financing.

Interest and repayment with the annuity loan?

The big feature of the annuity loan is that the annual annuity consists of an interest portion and a repayment portion. Borrowers pay interest to the bank with each installment and repay a portion of their loan at the same time.

However, the repayment portion is very low at the beginning of the term. With each installment paid, the repayment portion increases, because the interest portion decreases slightly. This results in the fact that consumers have a very high redemption portion towards the end of the term.

In addition, the division into the interest and redemption portion means that the annuity always remains at the same level.

The interest saved flows directly into the repayment of the loan. The repayment portion is always at least 1% of the loan amount at the beginning of the term. This means that 1% of the loan amount is repaid annually. For a loan amount of 300.000.00 EUR, the repayment portion amounts to 3 % annually.000.00 EUR. Consequently, borrowers pay a monthly redemption portion of EUR 250.00. However, the initial repayment can also be higher. It can be agreed individually with the financing bank.

How does the annuity loan differ from other types of loans??

Many consumers do not understand the difference between the annuity loan and other types of loans. The main difference lies in the constant rate and the increasing redemption share. With an installment loan, borrowers agree on an installment at the beginning of the term. Although this rate also consists of an interest and repayment portion, the rate to be paid decreases continuously during the term of the loan. This is due to the fact that with the installment loan, the repayment portion always remains the same and the interest portion decreases.

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The rate is very high at the beginning of the term and low at the end of the repayment period. In the case of a fixed-rate loan, consumers only pay interest during the entire term of the loan. The loan is repaid in full on a fixed date. The annuity loan is the type of loan with the most constant and predictable rate. The loan remains flexible in that consumers can choose the duration of the fixed interest period themselves. This allows the annuity to be changed at predictable intervals. However, there is a risk that interest rates will rise at the end of the fixed-rate period, resulting in a significantly higher annuity.

The advantages and disadvantages of an annuity loan

The annuity loan has numerous advantages and disadvantages that borrowers should consider before taking out a loan. One of the biggest advantages of the annuity loan is the constant loan rate. Since the annuity remains the same during the term, consumers get a very good calculation basis. When you take out a real estate loan, you already know what the rate will be in 9 years. This makes for excellent planning flexibility. Another major advantage is that with each installment, the interest portion decreases and the repayment portion increases. Borrowers repay an increasingly large portion of their loan as the term progresses.

Among the advantages of the annuity loan is the constant interest rate. The interest rate cannot be changed by the bank during the fixed-interest period.

Those who take out a real estate financing or a forward loan in a low-interest phase will benefit from it for many years or even decades.

By the way, the interest amount to be paid is always calculated from the current residual debt. In the event of payment difficulties, borrowers can reduce the repayment portion or suspend it completely for a few months.

However, the annuity loan has not only advantages, but also disadvantages. The disadvantages include the high and over the entire term constant rate. Although it is an excellent basis for calculation and ensures good predictability. At the same time, however, the installment represents a long-term burden. With other forms of loans, the rate decreases and borrowers are successively relieved. This is not the case with an annuity loan. Another disadvantage is that at the beginning of the term, the repayment portion is very low. Borrowers pay only a very small repayment portion. Therefore, the residual debt at the beginning of the term decreases only slowly.

For whom is the annuity loan useful??

The annuity loan is not suitable for all consumers who want to take out a loan. It is predestined for people who want to pay the same high loan installment over a long term. In the context of long-term real estate financing, this approach is advantageous because borrowers often do not know what their income situation will be like in a few years' time. In general, the use of the annuity loan makes sense if a property is to be financed in the long term. The possibility of fixed interest rates provides a good hedging option with this form of loan.

This also applies to foward loans, which can be used to secure the interest in advance.

The conclusion to the annuity loan

The annuity loan is the most common type of loan in germany. Predominantly real estate financings are transacted with annuity loans. This type of loan is fundamentally different from other types of loans. One of the biggest advantages is that the loan rate remains the same throughout the entire term of the loan. Among the biggest disadvantages can be counted that the burden remains high over the complete repayment period of the loan. For people who want to calculate long-term and predictable, the annuity loan is exactly the right choice. Before taking out a loan, consumers should use an annuity calculator to compare the various loan types and offers from the banks in order to save interest and thus money in the long term.