The amortization plan of a loan is a document that indicates in detail the times and methods of repaying a loan. It is therefore a tool through which it is possible to understand the maximum amount of an installment to be paid, the date by which all the loan must be paid, the periodicity of each installment (monthly, quarterly, half-yearly) and the interest on the installment.
Amortization plan for a loan: how is it structured?
The loan amortization plan defines the repayment timescales and helps to understand which installment can be supported. That said, we can say that a plan that lasts fewer years has a more expensive installment than a longer plan, but what you need to know above all is that the installments of an amortization plan are composed of two main elements:
– the principal portion corresponds to the amount financed: as the installments are paid, the residual principal (the debt) decreases
– the interest portion which indicates the interest applied: the portion may vary for each installment because the interest rate is applied to the residual principal of the loan which decreases over time as the loan is repaid
Amortization plan for a loan: the various types and a focus on the French plan
Choosing the type of loan amortization plan is important because based on this choice the share of capital and the share of interest vary. Some of the types of an amortization plan are:
– French amortization plan
– Italian amortization plan
The French amortization plan is the most common type in Italy and is characterized by an increasing share of capital and a decreasing share of interest. What does it mean? Simply that at first the installment will mainly consist of the interest portion and will slowly decrease to balance with the capital portion. At the end of the amortization plan, all the loaned capital will be returned, but be careful: the amount to be repaid will always be the same every month, only the composition of the installment will change. With this type of amortization, the Erogante Institutions will be able to obtain the interest before returning the funded capital.
Loan amortization plan: the Italian plan
In addition to the French amortization plan, we have mentioned another type of loan repayment above: the Italian amortization plan. This method of debt repayment requires that the portions of capital are constant, while the portions of interest are decreasing. Therefore, the substantial difference between the Italian and French amortization plans is that in the first the installments to be paid are not constant over time: you will pay a higher initial installment and then pay less and less interest towards the end of the repayment and consequently the installment decreases over time. Precisely for this reason, the Italian amortization plan is more disadvantageous for credit institutions which are in fact much more oriented towards applying the type of French amortization to loans.
Amortization plan for a loan: discover our online calculator with just one click
Do you want to calculate the installment and interest? On our website we have created a special calculator to identify the installment, interest and amortization schedule of a loan. Use our free online service to get a clearer idea of your amortization plan