German method loan
The amortization by the German method is characterized by the payment of the interests at the beginning of each period and constant instalments in each period of time. The interests decrease as loan periods pass and the amortized capital increases over the life of the loan.
German method loan
It is a contract in which the financial firm (moneylender) gives to the client (borrower) an amount of money that has been agreed on, making them repay the amount borrowed with interests according to a payment schedule. The way in which this is made must be specified in the contract.
It is a real contract as the payment is an essential element for the contract to exist and, from that moment, obligations for the borrower are generated. Some of these obligations are:
• Paying all the formalization costs.
• Paying the fees for the operation.
• Making the capital amortizations within the agreed periods.
• Paying the interests within the agreed periods as well as the interests on arrears that can be generated by late payments.
In the German loan, the instalments are constant except for the one at the beginning that corresponds to the amount of the pre-payable interests of the operation. Thus, there are n+1 payments, whereas there are only n payments of interests, that go from the beginning to the n-1 payment. Their formulas are:
Being:
a: instalment of the period
Co: amount of the loan
n: number of periods
i: interest rate.