The installment of a personal loan is one of the most important aspects of the loan for those who sign it. In fact, together with the interest rate applied, it is the amount of the installment that is the easiest aspect to evaluate for the sustainability of a loan. So let’s find out what the personal loan installment is and how it works.
The installment: definition
By installment of a personal loan (but this also applies to a loan or a loan), we mean the periodic sum that the person who has taken out the loan will have to pay to the bank or the financial institution, to return what has been received. The installment usually has monthly frequency, even if nothing prohibits the possibility of identifying deadlines of different time duration.
What does the amount of the loan installment depend on?
The amount of the installment, ie the amount that will actually be paid by the borrower, depends on some factors. First of all, it is determined by the amount of the loan and by the time the personal loan is repaid. Note that the amount to be returned will never be equal to that received, but it will be added interest higher or lower, depending on the applied rate and the loan the same time. The installment is also functional to the duration of the loan itself: the longer the time is, the amount of the installment will be lower, and vice versa. In the event that the installment is not fixed, but variable, it is the depreciation plan applied to the element that affects the calculation of the installment .
The cost of personal loans
The definition that we gave in the previous paragraph, however, is a simplification, as it does not take into account possible ancillary costs other than the amount of interest, such as the collection costs of the installment, when foreseen. In this case, the amount of the installment must also be added to the costs, which must necessarily be indicated in the contract signed. To evaluate in the best possible way the actual cost of a personal loan and consequently the installments of the same, it is good to take into consideration the interest rate indicated as APR , which refer to the final cost of the loan.
How do you calculate the loan installment?
We have dedicated a specific guide to the calculation of the installment of the personal loan. However, even here it is good to specify how the loan installment is calculated. In most of the loans granted in Italy, the amortization plan used is the French one , which requires that whoever takes out the loan pay an equal installment for the duration of the loan (to know the other types of amortization plan, refer to the specific guide).
The amount of the installment is therefore always the same: what changes is however its composition. In fact, the installment is made up of two parts, called share capital and interest share , which correspond to the part of capital paid with the single installment and the part relating to interest. We have said that the final figure that those who take out a loan returns is given from the capital received and interest on the loan. However, interest and capital are not divided equally by the number of installments.
The amortization plan applied establishes the method of subdividing the two parts. In the French amortization plan, for example, the first installments are made up entirely of the interest component , to which a part of an increasing share of capital is progressively added. In a nutshell, the first to be welded will be interest on the loan, while the figure paid as loan will be paid only subsequently, to an increasing extent with the passage of time duration of funding.
The details of the amortization plan must be communicated to those who choose a personal loan; usually the installment plan is more than enough to know how the personal loan will be returned, while normally less important for the average underwriter is to know in detail how the installment is calculated.
However, being aware of at least the basis of the calculation of the installment of a personal loan allows you to make a more informed choice in identifying the loan that best suits your needs.