Credit amortization

Since crisis has started many families have lost their homes because they couldn’t repay their loans. Furthermore when property was sold people wouldn’t have gotten all the funds they have paid to bank. Today I`ll explain you, my dear reader, how and why such things actually happen. Firstly because of the contract and secondly, because of features of credit repayments. Today I`ll explain you, my dear reader, how and why such things actually happen.

As I’ve already mentioned, there`re two types of credit repayments:

·         Annuity;

·         The Sinking Fund Method.

The Sinking Fund Method:

We assume that the payments made prior to the end of the loan term do not contain any portion of the principal, i.e., they only go toward the interest;

• Hence, a single “lump-sum” payment should repay the entire loan at the end of the loan term.

• In order to finance this final payment, the borrower might wish to make deposits on a separate savings account during the life of the loan. This account is called the sinking fund account.

As u can see, your first payment is 36% bigger than the fifth. That`s why this method is so uncomfortable for both sides: bank and you. You will have to pay different sums, it`s harder for you to pay at the beginning, and that`s not quite comfortable for bank, because it makes him more everyday trouble.

Annuity:

When a loan is an amortized loan, each payment is understood to consist of:

1. the interest due on the outstanding loan balance;

2. the rest of the payment which goes towards reducing the outstanding loan balance and which is referred to as the principal payment.

Here you can see that all your total payments are the same, but first payments consist more of interest than from part of loan principal repayment. This method is good because it brings stability into chaos economic system. This is why you won`t get all the money you`ve already paid to a bank, because you paid interest, not principal.