How a loan's repayment schedule is drawn up

In the table of repayment of a loan breaks down in detail from the interest rate that pay until how evolve the debt.
It may sound very technical, but in essence, the repayment schedule of our loan is nothing more than a table that shows how the debt evolves over time. In the financial sector there are different ways to repay the money that a bank lends to its customers, although in Spain the most common is the French method. No we will go over what it involves and, above all, why it is important for you to know how a loan repayment schedule is drawn up.
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How the repayment of a loan works

In any loan there are three key factors that come into play: the capital lent, the interest rate at which it is lent and the repayment period. These three variables, combined in one table, help us to draw up our repayment schedule, which sets out the composition of the installment payment month by month.

  • Capital lent: this is the total sum of money we receive as customers.
  • Interest rate: this is the price of obtaining that money. The interest rate can be fixed (it never changes) or variable (it varies based on a reference rate, which is usually the Euribor).
  • Repayment period: the length of time we have to repay the loan, divided into monthly installments.

As we have explained, the loan repayment schedule is usually calculated in Spain using the French method, whereby the customer will always pay the same monthly installment throughout the life of the loan. Of course, this depends on the interest rate that is chosen – fixed or variable rate – and the possible conditions under which the loan is contracted; for example, some banks offer loans that have a lower monthly installment payment during the first few years of the loan.

Anyway, that monthly installment will always be composed of two elements: the capital we have been lent and which we are repaying, and the interest charges we pay for that money. Therefore, using the repayment schedule we can see how that debt evolves month by month with the payment of the installments, and check that the interest charges we pay for the capital we have requested get smaller and smaller every month in the installments we pay, in proportion to what we have left to pay of the loan.

At this point it should be stressed that the cost of a loan is higher the longer it takes to repay the money, since interest is charged for a longer period. But let's look at everything more clearly with the following example.

Repayment schedule example

For the following example, we will simplify all the possibilities when applying for a loan as far as possible. Let's imagine we need €20,000 for a new vehicle and we go to our trusted banking institution to get it. There they tell us that the interest rate of the loan is a 7% annual fixed rate and they offer us to repay it over 10 years. Therefore, our repayment schedule is as follows: 120.

  • Monthly installment: €232.22.
  • Composition of the first installment:
    • Capital that we are repaying: €115.55.
    • Interest: €116.67.
  • Composition of installment number 60 (halfway through the term of the loan):
    • Capital that we are repaying: €162.86.
    • Interest: €69.36.
  • Composition of installment number 120 (last installment):
    • Capital that we are repaying: €230.29.
    • Interest: €1.34.
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These numbers show how the composition of our monthly installment has changed. We have gone from paying 50.24% in interest in the first installment to paying 29.8% in installment number 60. By the end of the repayment period, the interest we pay represents barely 0.5% of the total of the monthly installment. In other words, we pay practically no interest at all.

Broadly speaking, that is how the loan repayment schedule works, which shows us that the higher the loan amount and the repayment period, the higher the proportion of interest paid in each monthly installment. It is therefore a very useful tool for knowing what we are paying at any given time and for weighing up different options when taking out a loan.

Last of all, we should add that BBVA provides a loan calculator for you to use, to discover in detail the repayment schedule for your loan.

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