Credit installment defined

A credit installment is the monthly payment made to a lender to repay a loan. It includes not only the principal but also interest and insurance costs, which vary over time and based on the borrower’s profile.

Components of a credit installment

The installment consists of three parts: capital repayment, which increases over time; interest, which decreases as the loan progresses; and insurance, which covers risks like death or disability and varies by borrower and loan type.

Amortizing loans vs. loans in fine

Amortizing loans, such as mortgages, have fixed installments with changing capital and interest portions. Loans in fine, less common, involve paying only interest monthly and repaying the full capital at the end, resulting in lower installments but higher overall costs.

Formula for calculating installments

The standard formula for calculating a credit installment is M = C × [t / (1 − (1 + t)^−n)], where M is the monthly payment, C is the borrowed amount, t is the monthly interest rate, and n is the total number of installments. Excel offers a function to simplify this calculation.

Loan duration and cost trade-off

Extending the loan period lowers monthly payments but increases total interest costs. For example, a 140,000 € loan over 25 years at 3.5% results in a monthly installment of around 700 €, with total interest exceeding 70,000 €.

Consumer credit vs. mortgages

Both consumer credit and mortgages use the same formula, but mortgages are used for real estate and have longer terms and lower interest rates. Consumer loans are shorter, have higher rates, and are used for goods like cars or appliances.

Factors affecting the installment

Several factors influence the installment, including the loan amount, interest rate, duration, down payment, and insurance. Insurance typically costs between 0.1 and 0.5% annually and is added to the monthly payment.

Early repayment and optimization

Repaying a loan early is more beneficial initially, when a larger portion of the installment covers interest. Practical tips include using online calculators, such as those from the Bank of France, to consider fees, insurance, and down payments for accurate calculations.