Decreasing installment: what it is and how it works in financing

When buying a home, the investor needs to analyze many things to make sure that the property purchased meets the needs – and that includes choosing the best form of financing. For this reason, you need to know what down payment is.

Imagine that you start paying the installments and, over time, the amount gets smaller. It seems like something difficult to happen, doesn’t it? However, that possibility is real.

If you were interested in learning more about decreasing performance just follow this article to the end.

Good reading!

What is decreasing installment?

Financing with decreasing installments is a consequence of the Constant Amortization System (SAC).

SAC is a type of financing in which the incidence of interest falls on the value of the client’s current debt.

Therefore, as the customer settles debts with the banking institution, the impact of interest on the value of the installment is less.

What is the advantage of SAC?

This type of calculation is ideal for anyone who is concerned with the impact of long-term financing, as with newlywed couples, for example.

In that case, these investors may be wary of not being able to pay off debts in the future or of having to forgo other investments in order to be able to maintain payment.

Over time, having to honor the payment of a fixed installment of a property can inhibit other investments, such as buying a car and taking trips or courses. On the other hand, with the decreasing installment, the debt is getting smaller and smaller.

How does the decreasing installment work?

When a bank lends money to a customer, there is a possibility that the customer will not be able to repay the debt. This is one of the reasons for charging interest.

In the Constant Amortization System (SAC), the bank understands that the risk of default decreases as the customer pays the installments.

As the risk is higher in the first payments, the first installments are more expensive. Over time, the debt having been partially paid, the risk to the bank is less, and the installments fall.

Let’s take an example: a person finances R $ 80 thousand in the purchase of a house.  Payment will be made in 40 monthly installments. The interest rate charged will be 2% per month.

The first installment of the financing will cost R $ 3600. In this installment, we have R $ 2000 (R $ 80 thousand / 40 installments) + 2% interest on R $ 80 thousand (R $ 1600).

However, the last installment of the financing will cost R $ 2040. This considerable reduction occurs because the interest was not calculated on the total loan amount (R $ 80 thousand), but on the remaining amount of the debt (R $ 2 thousand).

But one fact is important: the system of decreasing installments is recommended for those who have calculated the impact of the highest installment on their budget and concluded that the payment is viable.

 

Author: blog-admin