How does a French method loan work?

We'll explain how this type of loan works.
There are many types of loans. The basic difference lies in how the amount of the monthly installments is calculated. Each loan has its own formula for calculating repayment installments, the interest and the total amount to repay. In Spain, when we apply for a loan or a mortgage, a French method loan is provided.
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The French method loan is the most popular because the formula used to calculate the monthly installments guarantees that the monthly payments are always a fixed amount for the life of the loan, and do not increase or decrease. This way, you always know how much you have to pay. However, in the case of a variable-rate mortgage, the installments may increase or decrease every six months based upon changes in the reference index (usually the Euribor).
Take into account that this installment, which will be a fixed amount throughout the life of the loan, already includes the interest and the repayment of the capital. The only thing that will vary will be the proportion we pay of these two elements: as the first increases, the second will decrease, so that the repayments are always the same. Since the capital that must be paid is very large during the initial years, the interest will also be greater. For this reason, we usually begin by paying a greater proportion of interest, and as time passes and the interest payments goes down, we begin to repay the capital, increasing the proportion of the capital repayments in the ratio.
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We hope you found this information about French method loans to be helpful. If you should need any more information, please contact BBVA, and we will be happy to help.
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