Amortization of financing

Amortization is the reduction in the value of a debt through partial payments. It is the process that occurs, for example, when a debtor pays the installments of a loan that he requested from a bank. Each month, the debit balance will be reduced, that is, it will be amortized.

Amortization is made on the  capital  called  debt  , which corresponds to the amount that was actually loaned to the debtor. If a financing of R $ 100 thousand was made for the purchase of a house, for example, the principal of the debt will be equal to these R $ 100 thousand.

Regularly paid debt installments include not only amortization of the outstanding balance, but also other charges, such as  interest and commissions  .

Amortization and these other fees may be distributed differently in the financing installments. It is this difference that is responsible for the existence of more than one type of financial amortization system.

The most widely used amortization methods in Brazil are the  Constant Amortization System (SAC)  and the  Price table  .

How does the SAC method work?

The SAC method is the most common in long-term financing, especially for real estate. By this method,  the installments will decrease  in value as the debt is paid.

This is because the SAC method provides a constant amortization, that is, each month the debtor repays the same amount of the capital of his debt. The difference in the value of the installments, however, occurs due to interest.

Since interest is calculated on the outstanding balance, that is, on what remains to be paid, they are higher at the beginning of the financing than at the end. Since the principal of the debt is reduced with constant amortization, the installments become cheaper over time because the interest rates are lower.

How does the price method work?

The Price method, also known as the French system, makes the value of the installments paid by the debtor the same throughout the duration of the financing.

It is this system that is generally used, for example, in the purchase of household appliances and vehicles in the  installment plan  .

Using the price method, interest is calculated in advance and distributed in installments. The amount of amortization, in the case of the price table, is not constant: in some months there is a greater reduction in the principal of the debt than in others.

What characterizes the method, therefore, is that the sum of the amortization with interest must always result in the  same value of the installment  .

SAC or price?

In the case of real estate financing, for example, banks often offer consumers the option of choosing between the SAC method and the Price method. Having the opportunity to choose often raises questions about which of these systems is the most advantageous.

Amortization using the SAC method results in  lower interest expense at the end  of the installment plan, making it considered the most advantageous in the long term.

However, the initial installments of this type of financing tend to be higher than those in the price table, so it is necessary to take into account if the consumer has the financial resistance to pay this higher expense in the first months of payments.