What is the difference between an annuity loan and a repayment loan?
What is the difference between an annuity loan and a repayment loan?
An annuity loan is a type of credit where the borrower pays consistent installments throughout the loan term. These installments consist of two components: interest and principal repayment. Over time, the proportion of these two components changes. The interest portion decreases while the repayment portion increases, due to the declining loan balance. This means that as time progresses, the borrower pays less interest and more of the original loan amount.
On the other hand, a repayment loan involves a fixed repayment amount. This means that the total installment paid by the borrower is higher at the beginning of the loan. Over time, this installment decreases as the interest portion applied to the remaining debt reduces. Consequently, the borrower pays less interest over time, while the amount repaid toward the loan principal remains constant.