Installment loan

Installment Loan - An installment loan (also known as an amortizing loan or repayment loan) is a type of loan in which the principal is repaid in equal installments, while the interest portion decreases as the outstanding balance decreases. Unlike an annuity loan, where the total payment (interest + principal) remains constant, the monthly payment on an installment loan decreases over the term. In the real estate sector, it is primarily used by capital investors and commercial investors.

How It Works and Payment Schedule

With an installment loan, the loan amount is divided into equal principal payments. Example: For a loan of 300,000 euros with a 20-year term, the monthly principal payment remains constant at 1,250 euros. Interest is calculated on the remaining balance and decreases with each repayment installment. In the first month (at a 3% interest rate), the total payment is €2,000 (€1,250 principal + €750 interest). In the final month, it is only about €1,253. The total interest burden is lower with an installment loan than with an annuity loan of the same term because the remaining balance decreases more quickly.

Comparison with an annuity loan

The key difference: With an annuity loan, the monthly payment remains constant (e.g., €1,500), while the principal portion increases and the interest portion decreases. With an installment loan, the principal payment remains constant, and the total payment decreases. Advantage of the installment loan: lower total interest costs and faster debt repayment. Disadvantage: The initial burden is higher because full principal plus full initial interest must be paid. For investors, the installment loan is tax-advantageous because the initially high interest payments are deductible as business expenses.

Installment Loans and Tax Optimization for Rental Properties

For landlords, the installment loan is particularly attractive from a tax perspective because the interest burden is highest in the first few years of the term. Since interest payments on rented properties are fully deductible as income-related expenses against rental income (§ 21 EStG), this results in maximum tax relief in the initial phase. Over time, interest payments decrease-and with them the tax benefit-but at the same time, the total monthly burden also decreases, which gradually improves the investor’s cash flow.

Another advantage: Since the principal repayment remains constant, the installment loan is more transparent in terms of debt accounting than an annuity loan. Investors can plan exactly when they will be debt-free and easily calculate the remaining debt at any time. For institutional investors and real estate companies that must prepare financial statements in accordance with IFRS or HGB, this predictability is an additional advantage.

It should be noted that not all financial institutions offer installment loans for private real estate financing. Specialized real estate lenders and larger banks offer this type of loan more frequently than regional savings banks and cooperative banks, which prefer annuity loans.

Practical Tip for Property Owners in Nuremberg

We recommend that investors in the Nuremberg metropolitan area who are financing a rental property consider the installment loan as an alternative to the annuity loan. The initially higher interest payments result in a greater tax benefit (higher income-related expenses), while the decreasing total installment significantly eases the cash flow burden starting in the second half of the term. Especially for properties with secure rental income (e.g., apartments in Nuremberg-Erlenstegen, Gostenhof, or the Frankenviertel), the higher initial burden from the rent is quite manageable.

Not all banks offer installment loans for private investors-be sure to inquire specifically with your primary bank or specialized financial advisors. In the Nuremberg metropolitan region, we work with experienced financing brokers who compare various loan models and help you find the financing option that best suits your tax situation. A detailed consultation with a tax advisor before making a financing decision is highly recommended for investment properties.

Frequently Asked Questions

Who is an installment loan suitable for?

The installment loan is particularly suitable for investors (tax-optimized interest allocation), borrowers with above-average income (who can afford the higher initial payments), and borrowers seeking rapid debt repayment. For owner-occupiers on a tight budget, an annuity loan is usually a better fit, as the constant monthly payment makes financial planning easier.

How much do I save on interest compared to an annuity loan?

For a loan of 300,000 euros, 3% interest, and a 20-year term, the total interest cost for an installment loan is approximately 92,000 euros, while for an annuity loan (2% initial principal repayment) it is approximately 108,000 euros - a savings of around 16,000 euros. The exact difference depends on the interest rate, term, and repayment agreement. The higher the interest rate, the greater the advantage of the installment loan.

Can I combine an installment loan with extra payments?

Yes, many banks offer installment loans with the option of free extra payments (typically: 5-10% of the original loan amount per year). Extra payments further reduce the remaining debt and thus also the interest burden. Combined with the already steadily decreasing installment, this results in very efficient debt reduction. Make sure that the right to make extra payments is agreed upon in writing in the loan agreement-otherwise, the bank may charge an early repayment penalty.

How does an installment loan affect an investor’s liquidity?

The installment loan places a greater strain on cash flow in the first few years of financing than a comparable annuity loan, as full principal payments coincide with the highest interest payments. For investors with rental properties in the Nuremberg metropolitan area, we therefore recommend carefully weighing the initial burden against the expected rental income. For a rental property with a monthly base rent of 1,800 euros and an initial payment of, say, 2,000 euros (principal + interest), this results in a negative cash flow, which is partially offset for tax purposes by high business expenses but requires liquid funds. Over time, this situation reverses: In the second half of the term, the monthly payment is significantly lower than the rental income, which significantly improves the investor’s liquidity position. Detailed cash flow planning over the entire planned holding period is therefore particularly important with this type of loan.

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