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Loan Amortization Plan: How is it calculated?

Loan amortization plan: how to calculate

Loan amortization plan: how to calculate

When analyzing a loan, the amortization plan is a fundamental factor since it indicates the repayment methods and the relative timing for the repayment installments. But how do you calculate the amortization schedule?

The amortization plan calculation allows you to evaluate the actual feasibility of a loan before applying for it. This is because the amortization schedule shows all the information related to the loan repayment.

The loan market currently has different types of amortization plans, each with different repayment methods. However in Italy the most used calculation method is the one called “French”. In this article, therefore, we will deepen the calculation of the amortization plan by referring to this type of repayment.

How the French amortization plan works

How the French amortization plan works

As already mentioned, the amortization plan defines both the timing and the methods for the payment of the loan repayment installments. Installments with an amount defined on the basis of the interest rate applied to the loan.

In this regard, we remind you that the amortization installments consist of two distinct portions: principal and interest. The first corresponds to the capital lent by the lending bank. The interest portion, on the other hand, concerns the sums due as interest, defined on the basis of the rate applied to the loan.

The composition of the installments may change according to the type of amortization plan applied. Specifically, French amortization is a two-step debt settlement program.

In the first phase, the periodic installment is mainly composed of the interest portion. This will decrease over the months, with a simultaneous increase in the share capital. In the final phase of the contract, on the other hand, it will be the principal amount that constitutes the majority of the repayment installment.

Amortization plan online calculation

Amortization plan online calculation

However, what has just been said does not mean that the amortization installments have a variable amount. The beneficiary must always pay the same amount monthly. The only difference is represented by the percentage of interest and capital shares that make up the installment.

In short, therefore, by opting for a loan with French amortization, the creditor ensures that the customer repays the interest first and then the loaned capital.

We remind you that for the purpose of determining the installment amount, the interest rate is also a determining variable. Those who opt for a fixed rate loan are sure of a repayment with constant payments. Those who choose variable rate loans instead are subject to the effects of market changes.

How to do the amortization plan calculation? As we have seen, there are several factors to consider when calculating the loan amortization schedule. This operation is often difficult for those who are not experts in financing.

Those who wish to calculate the depreciation plan despite not having particular skills can resort to special online services. On the Net there are in fact several calculators that allow you to simulate the amortization of a loan simply by entering some essential data (rate, duration, amount, etc.).

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When does an unpaid loan expire?

When does an unpaid loan expire?

When he takes out a loan from a credit institution, the latter performs a series of checks in advance aimed at verifying the applicant’s ability to repay the amount of money requested (plus interest).

In practice, the credit institution takes care to check that the person to whom the loan is granted can pay all the installments foreseen for the repayment of the sum lent to it.
Despite the checks that can be carried out by the lender, it can sometimes happen that the debtor is no longer able to pay the installments and therefore to return the money.

What happens if a borrower no longer pays the installments of a loan?

What happens if a borrower no longer pays the installments of a loan?

In Italy there is only one case involving the arrest of an insolvent debtor against a lending institution, this is the so-called “fraudulent insolvency”.

This offense occurs when, despite being aware of the impossibility of returning the sum of money obtained as a form of financing, an entity also signs the contract.
This may be the case for an employee who knows that he will be fired shortly and does not communicate this important information to the credit institution.
For all other cases of insolvency, only foreclosure of the assets and salary is foreseen.

Credit prescription for loans between individuals

Credit prescription for loans between individuals

When it comes to loan prescription it is necessary to spend a few words also for loans between individuals. Italian law in fact allows loans to be granted not only by banks and financial companies, but also by private entities. Loans to be taken out in the form of a loan agreement.

But how does the prescription for loans between individuals work? In general, when it comes to prescription, the general rule of limitation applied to all contractual relationships applies to loans between private individuals. Loans between individuals are therefore considered prescribed after 10 years.

However, loans signed with professionals are an exception. Loans that are subject to a special regime, which provides for a prescription in 3 years. Finally, we remind you that if the lender renounces the return of the money, it will not be possible to retrace his steps.

In other words, if in a private loan the lender renounces, by signing a specific declaration, the refund will no longer be able to request the money back and the prescription in 10 years will cease.

When does an unpaid loan expire?

When does an unpaid loan expire?

The terms for defining a debt as prescribed can vary from case to case, even if they are generally foreseen from 5 to 10 years.

In the case of non-payment of installments of mortgages, loans or loans, the forfeiture is ten-year. This means that for this category of debts the prescription is set after 10 years from the last unpaid installment.
The time frame is the same also for the loans disbursed by Social Security.
During these 10 years, the lender has plenty of time to recover the amount it deserves.
The prescription of a loan is governed by art. 2946 of the Civil Code and provides for (temporal) differences for some categories of credit, for example:

  • 5 years for ostentatious credits for rents, interest, wages, severance indemnity and pension;
  • 3 years for credits deriving from professional activities;
  • 2 years for credits related to vehicle circulation;
  • 1 year for credits linked to the payment of insurance premiums;
  • 6 months for credits due to hotel activities.

Before the loan prescription date arrives, the borrower receives numerous reminders to pay from the lender. In these cases, a debt collection company is often involved. These are private agencies that operate out of court and take care of inviting the insolvent debtor to pay the amount due, by registered letter, by telephone and in person at home.
Furthermore, a person who does not honor the loan is registered in the register of Credit Information Systems, where all insolvent debtors are counted.

Practical example

Practical example

If Luigi decides to apply for a loan from a credit institution and this is granted to him for five years, but after two years from the stipulation of the contract Luigi is fired and is no longer able to repay the sum of money received, what happens?

The 10-year period starts from the date of non-payment, during which the credit institution can exercise its right to collect the amount of money given on loan (plus interest).
During this time, the institution can assert its interests by attaching everything that appears to be owned by Luigi. At the end of the 10 years, the loan goes into prescription and Luigi’s assets can no longer be foreclosed.

However, this period of time can be interrupted by the notice of formal notice, with this stratagem, the credit institutes start the beginning of the 10 years, necessary for the prescription, from the date on which the communication was received from the debtor.