Today you can borrow money on a lot of goals. It will therefore not surprise you that there are also various ways to get hold of this borrowed money and then pay it back. Thanks to this diversity of options, it has become a lot easier for potential borrowers to find a loan that best suits their personal situation and finances. One of the ways you can borrow money in us is through a so-called linear loan. We will tell you more about the operation of this loan form below.
What is a linear loan?
A linear loan is a form of loan where the outstanding debt is repaid equally with you. The installments that you have to pay back are made up of a certain part of interest and a part of repayment. The interest that you owe to the lender will be calculated on the portion of the principal that is still outstanding at that time. The term principal refers to the total amount of money that you have borrowed in this way, while the total costs refer to interest and repayment. At the start of the term (the period in which you must have repaid the total debt to the lender), the interest and the repayment will be relatively high because the principal is still high at that time. You will therefore have to pay a lot of interest.
Due to the fact that the principal is gradually being repaid, you will have to pay less and less interest over time. Because the costs are going to decrease slowly, you will get a certain degree of certainty with regard to interest rate increases: if the interest rate will be increased after a few years, the total costs will generally not be higher than those at the beginning of the duration. In addition, the principal sum will decrease, with the result that interest rate rises will have less impact on the final costs. Given all these characteristics, a linear loan is extremely suitable for borrowers who want to see the monthly costs continue to decrease.
Calculation of the repayment amount
The repayment amount for a linear loan will be calculated by dividing the total loan amount by the full term. With a loan amount of € 100,000 and a term of 30 years (converted 360 months), the repayment is € 278 per month, excluding the interest that still has to be paid. Due to the fact that the part to be repaid continues to fall, the interest charged on it will also decrease. This also means that the monthly charges will go down because, in addition to the fixed repayment, an ever-decreasing part of interest has to be paid.
Linear loan as a mortgage
In certain cases, a linear loan can be the ideal way to borrow money to finance your own home. Consider a situation in which you, as a young adult, are going to finance your own home with the help of a linear mortgage. At the start of the term, you will then bear the level charges each month, while as time goes on you will gradually decrease these charges. People who opt for this loan option often have a good job and gradually want to pay less and less on this loan. That way they can, if things go a little less financially later in life, continue to pay off the mortgage. If their financial situation does not deteriorate, they can even create more room for maneuver (because less and less has to be paid on the mortgage repayment) and start saving money or spending it on other important or fun things.
Benefits of a linear mortgage
When you decide to take out a linear mortgage, you can count on a number of important benefits, such as:
- in the case of borrowing this type of money for the financing of, for example, your own house, you will have the certainty that you have repaid the total loan amount at the end of the term,
- By opting for a linear mortgage you know for sure that the monthly payment will decrease over the course of the term. In particular if you expect your income to fall in the future, for example because you will retire, this way of borrowing money can provide a lot of security,
- Over the entire term of the linear mortgage you will pay less interest charges than with most other mortgage types. This has everything to do with the fact that you only have to pay interest on the mortgage amount that is still open and with this loan form you pay off the loan in equal installments from the first month,
- a linear mortgage is a simple form of mortgage that makes it easy to compare with multiple banks and other mortgage lenders, especially when compared to making comparisons of most other types of mortgage,
- if the interest rate starts to rise after a few years, the decreasing debt will ensure that you usually pay less, or the same amount, per month, than at the start of the loan.
- compared to other forms of mortgage, you will pay relatively little interest.
Disadvantages of a linear mortgage:
Like most loan forms, the linear mortgage not only has advantages, but certainly also some disadvantages. A number of disadvantages that are mentioned are:
- since there are even repayments, the linear mortgage will certainly be (considerably) more expensive in the first few years than most other types of mortgage,
- by paying off with a linear mortgage during the term of the loan, you will be able to benefit much less from certain tax advantages compared to other forms of mortgage,
- not all lenders will offer a linear mortgage in their assortment a linear mortgage, which means that you sometimes have to search for some time before you find a suitable offer,
- at the start of the term, the monthly costs of a linear mortgage will be very high and you will therefore be limited in your spending pattern. This type of loan is therefore not suitable for people with a low income.
Characteristics of a linear mortgage
In short, it can be said that a linear mortgage is characterized as follows:
- this type of mortgage has a fixed end date,
- during the term an equal amount of repayment is paid every month,
- with this loan form you have more certainty that the mortgage will be repaid in full,
- the repayment and the interest (also called the gross monthly payment) will be high at the start of the term, but will decrease over time.
A linear loan (and therefore also the linear mortgage) most closely resembles a regular loan. With this way of borrowing money, you can easily pay off in equal parts. If you assume a term of 30 years (360 months) then you will repay 1 / 360th of the debt each month. Due to the fact that you are going to pay less and less interest on the declining debt, that means that you will have to deal with high net monthly costs at the start of the term, but will fall during the course of the loan. This is particularly interesting if, for example, you want to work less in the future.
With a linear loan you can determine the duration yourself. The sooner you pay off the outstanding debt, the higher the monthly payments will usually be. In addition, if you take out a linear mortgage, you will also have to take into account a mandatory life insurance policy that you must take out. If you or your partner dies, the surviving relative will receive a benefit. The insurance will almost always pay the amount that is still outstanding. It is therefore possible that the payment may fall proportionally with the outstanding debt.
With the money you put into the mortgage, no further action will be taken. That way you can enjoy a high degree of certainty, although you will not be able to achieve a return with this money. On the other hand, you also run the risk of not being able to repay the linear loan.