Having to make a consideration on the greater convenience between personal loan or pre-purchase amortization, it is good to take into account some elements, first of all the value of the asset that shifts the capital from assets to liabilities generating an amortization fund composed of the annual installment called depreciation charge paid to each year by the company; this is done in order to establish a suitable capital to repurchase the asset when it is necessary.
The depreciation fund is obtained by subtracting from the presumed future purchase value of the asset the commercial value that it will have at the time of disposal. At the end of each year, a portion of capital is set aside which, when the useful life of the asset ends, will constitute the countervalue for the replacement. Let’s try to reflect on the convenience of personal loan or pre-purchase depreciation.
Example of pre-purchase amortization
An example can be given to understand how the logic of pre-purchase depreciation works: a machine with a value of 100,000 euro has a useful life of 3 years, the market rise in 3 years is supposed to be 10%, so the estimate worth € 110000; if it is supposed to sell the asset after 3 years at half price, ie at 50,000 euros, to repurchase the asset there will be a need for a fund equal to 110000 euros less 50,000 euros, or 60000 euros, divided into three years in installments of 20000 euros per year. In the case of a lease, the depreciation charge is given by the lease payment plus an additional amortization if the asset is to be redeemed at the end of the contract.
Example of personal loan
The case of a personal loan for a private person can start from this logic of depreciation, assuming to buy a car entirely owning the necessary capital, to then estimate how much it would cost to purchase a car of a higher category, what would be the time of use of the vehicle based on the annual use, what would be the value of the car at the end of its useful life according to average prices, defining at the end what would be the depreciation fund and the relative share. For example, a car worth 18,000 euros, usable for 30000 kilometers per year for 5 years, at the end of the period will have a commercial value of 7000 euros, so the capital to be restored at the end of the five-year period amounts to the value of a new car of superior category equal to 25000 euros between 5 years for 22000 euros current minus 7000 euros, then 18000 euros, to be divided into 60 monthly installments of 300 euros without any interest.
The reasoning on the choice between personal loan or pre-purchase amortization depends on the ability to obtain a return on capital, ie to invest it, cashing out what is termed an active interest in the economy; if the bank grants a 4% per annum on the deposited capital, the gain at the end of the year on the 18,000 euros will be equal to 720 euros for a total in 5 years of 3600 euros. If you imagine getting a 7% Taeg for a 5-year consumer loan , you would pay a monthly installment of 357 euros, returning a capital plus interest of around 21385 euros for the total payable interest in the amortization period at 3385 euros. So: the collection would be 3600 euros, while the interest payable would be 3385 euros; consequently it would be advisable to keep the money in the account and ask for a consumer loan at those conditions already indicated.
The active interest rate is 4%, the passive one 7%, however in the repayment of the loan the French rate is applied so that there is a scalar trend of the interests according to the capital returned. To establish which is the correct financial driver between personal loan or pre-purchase amortization, it is advisable to make a precise calculation of total interest receivable and payable, to then estimate exactly how much gains and losses, reaching a rational solution to the problem, even taking into account fluctuations in the value of certain variables such as interest rates.