Installment Loan
What is an installment loan?
An installment loan is a type of loan that is repaid over time with a set number of scheduled payments. Unlike revolving credit (e.g., credit cards), the loan is fully repaid at the end of the term.
This example demonstrates a fixed principal repayment model, where the borrower pays off the same amount of the loan each year, while interest decreases over time.
Formula
Annual Interest = Remaining Debt * Interest Rate
Principal Repayment = Total Debt / Loan Term
Annuity (Annual Payment) = Interest + Principal Repayment
Remaining Debt = Previous Debt − Principal Repayment
Example
Assuming a loan of €100,000 with an interest rate of 5% and a fixed annual principal repayment of €25,000 over 4 years:
| Year | Remaining Debt | Interest (5%) | Principal Repayment | Annual Payment | Debt After Payment |
|---|---|---|---|---|---|
| 1 | €100,000 | €5,000 | €25,000 | €30,000 | €75,000 |
| 2 | €75,000 | €3,750 | €25,000 | €28,750 | €50,000 |
| 3 | €50,000 | €2,500 | €25,000 | €27,500 | €25,000 |
| 4 | €25,000 | €1,250 | €25,000 | €26,250 | €0 |
Total Interest Paid: €12,500
Total Repaid: €112,500