Annuity loan (annuitetslån)
An annuitetslån (annuity loan) is repaid so the total payment (principal plus interest) stays roughly the same every month over the whole term. Early on the payment is mostly interest, later mostly principal.
Annuity vs straight amortisation
The opposite is straight-line amortisation (rak amortering), where you pay off the same amount of the debt itself each month. Then the total payment is high at the start (a lot of interest on a large debt) and falls over time. An annuity loan smooths that out: the same total amount throughout. That gives a lower starting payment, but because you pay down the debt more slowly at first you normally pay a little more interest in total over the life of the loan.
Where it is used
Swedish CSN student loans are annuity loans, where the annual amount is also raised slightly each year. For mortgages you can often choose between straight-line and annuity; straight-line pays the debt down faster and costs less interest, while annuity gives a smoother monthly cost.
Where it shows up
- CSN calculator
- Mortgage calculator
Straight-line amortisation costs less in total interest because the debt shrinks faster. Annuity is easier on cash flow with its even payment. The difference is largest when the rate is high and the term is long.