The choice of a personal loan involves the creation by the bank or financial institution who place the loan on an amortization plan . Let’s find out what is meant by this term, and what are the different types of amortization of a personal loan that can be applied.
The amortization of a personal loan means the pre-established plan that identifies the method and the timing with which the loan received will be returned. The installments identified by the amortization plan are made up of two parts: the interest and the principal shares .
In the amortization plan, in addition to the amount and frequency of the installment, the residual capital to be repaid after each periodic payment is also indicated. Depending on the type of depreciation used (the differences of which will be discussed below), the installment may be constant , ie equal for the entire duration of the loan or variable over time.
However, there is not only a way to define the amortization plan. The most common are the French , Italian , German and American amortization plan. Let’s analyze the differences between the different plans and find out what is the amortization plan for personal loans most used for loans in Italy.
The Italian amortization plan is also called amortization with constant capital shares . Its main feature is in fact to have installments made up of a constant share of capital, to which are added the interest calculated on that principal amount. The peculiar characteristic of the Italian amortization plan is that of not having constant installments , but variable over time.
Contrary to the Italian amortization plan, the French plan provides for the presence of fixed installments , the amount of which contributes a capital quota that increases with the passage of time and a portion of interest that, on the contrary, decreases over time.
The German amortization plan is similar to the French one due to the presence of a constant installment over time but provides for a first installment of a different amount. In the German plan the interest rate is paid in advance ; for this reason the first installment is composed in its value only by the interest due, while the subsequent installments have both components of principal and interest.
The last type of amortization plan is the one called to the American one ; this type of amortization plan for personal loans provides for the presence of accumulation shares at two interest rates. In summary, the US plan provides for the presence of a personal loan (or in general a loan) to which a parallel investment is added.
Contrary to what might be expected, the type of amortization plan that is most used in our country is that of the French plan, that is, with equal installments. Nothing forbids, however, that in our country too different plans are applied. Questions about this specific feature can be asked to whom proposes the loan. In most cases, however, the presence of a cost installment indicates the application of the French amortization plan. This type is generally preferred precisely because it allows those who subscribe to the loan to be present at the time of subscription the amount of the installment to be paid for the return of the amount received.
However, nothing prevents banks or financial institutions from proposing different amortization plans compared to the French one, even if the application of different methods appears rather rare in the scenario of personal loans available on the market at the moment.