How does the French loan formula work?

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French loan

French loan, what is it and why is it worth knowing for those who are going to apply for a mortgage? The average citizen should know that the final loan amount depends on mathematical calculations. There are a large number of them and they are diverse. Very often, in Spain, to mortgages, the French system is applied to calculate advances.

What is the French loan?

The French loan is the most used because the formula that calculates the borrower's monthly payments acts in such a way that during the entire term of the loan a person will always pay the same rate, without ups and downs, avoiding uncertainty and unforeseen circumstances. However, in the case of a variable mortgage, the installments can increase or decrease every six months, depending on the benchmark.

It should be taken into account that this commission, which will be constant throughout the term of the loan, already includes interest and repayment of capital. The only thing that will change is the proportion that the individual pays for these two items: as the first increases, the second decreases, so the rates are always the same. Since the paid-in capital is very high in the first years, the interests will also be higher. Therefore, it is considered normal to start paying a French loan with a higher percentage, and over time, when it comes to an end (French system loan), people begin to depreciate the capital, increasing their share in the ratio.

What is the secret of the French loan formula?

When mortgages are calculated in the French loan repayment program system, a balanced commission is requested, which varies only according to the evolution of interest rates and varies only in the agreements (usually annual periods).

So, for example, for a mortgage of 300,000 euros for 30 years with an interest rate of 4%, the contributions will amount to 1,432.4 euros. In the first installment, 1000 euros will correspond to interest and 432.24 euros to the depreciation of the capital, while in the last installment only 4.76 euros will be spent on interest payments, and the rest to depreciation.

The distribution of the French loan calculation is not arbitrary in any case, it is deduced from the mathematical formulas to maintain constant installments and, in fact, directly benefits the bank, which provides the collection of interest faster than other depreciation models, which it is very interesting for banks in relation to possible early repayments that the user can make.

Due to its distribution, another characteristic of the French system loan is that the possibility of early repayment of principal loses interest over the years. At the beginning, for the bank, it is more profitable to wait for the mortgage money than at the end of the loan.

What makes a French loan attractive?

A great advantage of the French loan payment system from the point of view of the person applying for a mortgage is that stable and more affordable down payments mean that access to credit is favored by a lower proportion of commissions and income. However, there is a catch.

A major drawback of this payment system is that the interest on the first payments is proportionally higher in percentage than on the principal, which can be more attractive to the lender. This makes the long-term product on average more expensive than other options.

Benefits of a good credit rating for a French loan

The main advantage of a good to excellent credit rating is that it allows people to receive the money requested in a loan from the French system under the most favorable conditions. That is, the amount and term of the loan increase exponentially with a good credit rating, but the interest rate, on the contrary, falls.

Consequently, if a person has a low credit rating, it is very difficult for them to get a French loan. If this has happened, after all, then with a high probability the amount and term will be insignificant, but TIN will rise to the sky. Therefore, to have access to high-quality French loans, it is vitally important to be debt free and delinquent and to carefully monitor credit scores.

How to improve your credit rating?

Anyway, if the person has a bad credit rating and cannot get a French loan, this problem is solvable.

There are some tips on how to improve your credit rating:

  • A person should focus on choosing the loan amount responsibly and meticulously, having thought through this step well. One must clearly understand that they will have to repay these funds and therefore it is unacceptable to take large loans if a person cannot repay them. Remember the 30% rule. This rule states that the amount of money that a person pays for existing loans should not exceed 30% of their monthly income.
  • It is categorically not allowed to take new loans to pay off old ones. This path leads to a debt hole, from which it is very difficult to get out.
  • Making full online loan payments in full is the simplest and most obvious way to improve a credit rating.

French loan example

For example, if a borrower applies for a mortgage loan in the amount of 10,000 euros for payments over 3 years (36 installments) and with a constant monthly interest rate of 0.03%, he will pay:

Monthly payment: 458.04 euros

Total interest for three years: 6,489.37 euros

The total amount paid for the loan of 10,000 euros: 16,489.37 euros.

The mathematical formula for calculating the installment of the French loan is:

Fórmula del préstamo francés

C = face amount of the loan, principal amount.

n = duration of the operation in months, quarters, semesters or years.

i = effective interest rate for the period in question, if the duration was established in months, the interest rate must be indicated in months.

V = amount of the mortgage loan. This is a French loan formula.

If a borrower doesn't want to bother with math, there is usually a French loan simulator where the calculation is done in seconds by a machine.

about the author

Maria Solis Burley

Credit consultant in Spain. Financial Analyst at Crédito Victoria.
LAST UPDATED: February 2, 2020