What is more profitable: reducing the monthly payment or the term?
Posted: Wed Feb 19, 2025 5:38 am
Let's say that instead of repaying a loan with an annual interest rate of 10% early, the client opens a bank deposit with a yield of 7% for the same amount. In this case, the interest income on the deposit will not be enough to cover expenses and make a profit.
It's a different matter if the return on investment increases to 13% - for example, when placing money in an individual investment account, with which you can get a 13% tax deduction. In this case, there is no point in repaying the loan: the profit from the investment will exceed the amount of interest on the loan, and the borrower will remain in the black. And if the return on investment increases - for example, when buying federal loan bonds, the gap will be even greater.
Of course, the borrower does not necessarily have to look for alternative investment instruments to generate income, but in this case, he will miss the chance to get additional profit. Another option is when the client simply keeps cash as a financial safety net, but high inflation can significantly depreciate the assets in real terms.
It often happens that the borrower does not have the slovenia mobile database opportunity to repay the entire amount of the debt and close the loan in one payment. In this case, partial early repayment of the loan will help reduce the costs of servicing it.
There are two options here: reducing the monthly payment amount or shortening the loan term. In some cases, the contract may specify the scheme by which the loan will be repaid, but most often the bank gives the client the opportunity to choose.
Each person decides for themselves which option to choose. Much depends on the current credit load and repayment scheme.
According to the payment scheme, all loans are divided into two types:
annuity - the principal debt and interest are added together and divided into equal parts;
differentiated - interest is charged every month on the remaining debt, the payment amount gradually decreases.
In most cases, banks use the first option. With annuity payments, it is more profitable to reduce the loan repayment period. The amount of the contribution will remain the same, but you will end up paying less interest. This recommendation is fair if the credit load does not exceed 40% of monthly income. Otherwise, it is better to reduce the payment.
If we are talking about a differentiated repayment scheme, it is more profitable to reduce the size of monthly payments.
It's a different matter if the return on investment increases to 13% - for example, when placing money in an individual investment account, with which you can get a 13% tax deduction. In this case, there is no point in repaying the loan: the profit from the investment will exceed the amount of interest on the loan, and the borrower will remain in the black. And if the return on investment increases - for example, when buying federal loan bonds, the gap will be even greater.
Of course, the borrower does not necessarily have to look for alternative investment instruments to generate income, but in this case, he will miss the chance to get additional profit. Another option is when the client simply keeps cash as a financial safety net, but high inflation can significantly depreciate the assets in real terms.
It often happens that the borrower does not have the slovenia mobile database opportunity to repay the entire amount of the debt and close the loan in one payment. In this case, partial early repayment of the loan will help reduce the costs of servicing it.
There are two options here: reducing the monthly payment amount or shortening the loan term. In some cases, the contract may specify the scheme by which the loan will be repaid, but most often the bank gives the client the opportunity to choose.
Each person decides for themselves which option to choose. Much depends on the current credit load and repayment scheme.
According to the payment scheme, all loans are divided into two types:
annuity - the principal debt and interest are added together and divided into equal parts;
differentiated - interest is charged every month on the remaining debt, the payment amount gradually decreases.
In most cases, banks use the first option. With annuity payments, it is more profitable to reduce the loan repayment period. The amount of the contribution will remain the same, but you will end up paying less interest. This recommendation is fair if the credit load does not exceed 40% of monthly income. Otherwise, it is better to reduce the payment.
If we are talking about a differentiated repayment scheme, it is more profitable to reduce the size of monthly payments.