annuity due
Annuity Due is a series of equal payments made at the start of each period rather than the end, like rent you pay the first day of the month, not the last.
In plain English
Think of your landlord in Lekki who wants rent on the first of the month, not the last day. That timing detail, whether money changes hands at the beginning or the end of each period, is exactly what separates an annuity due from an ordinary annuity.
With an annuity due, every payment lands at the start of its period. Your salary might work like an ordinary annuity if it drops at month end, but your gym subscription or your landlord in Ikeja probably wants it upfront, at the start, which makes it an annuity due.
This matters more than it sounds because of timing and interest. If you are the one receiving payments, getting paid at the start of each period means your money starts earning interest or being useful to you sooner. If you are the one paying, an annuity due costs you slightly more in present value terms because you part with your cash earlier, with less time for it to sit and grow elsewhere.
A Nigerian example makes this real. Suppose you are paying ₦50,000 monthly into a savings plan, and your contribution is due on the first of every month rather than the last. Over a year, because each payment happens earlier, the effective cost to you is a touch higher than if you paid at month end, since your money leaves your pocket sooner and has less time to earn returns elsewhere.
In the United Kingdom, many insurance premiums and some pension contributions work this way too, taken at the start of the billing cycle rather than the end. Once you notice this pattern, you start seeing it everywhere, from car insurance to school fees paid in instalments.
You agree to pay ₦20,000 monthly for a year towards a cooperative loan, due at the start of each month. Because each payment happens earlier than it would in a standard annuity, the present value of your total payments is slightly higher, meaning this arrangement effectively costs you a little more than if the same payments were due at month end.
Questions people ask
What is the main difference between an annuity due and an ordinary annuity?
The timing of each payment. An annuity due pays at the start of every period, while an ordinary annuity pays at the end. Rent is usually an annuity due, while many loan repayments follow the ordinary annuity pattern instead.
Why does an annuity due cost more than an ordinary annuity?
Because you or your money moves earlier in each period, there is less time for that money to earn interest elsewhere before it is spent. This makes the present value of an annuity due slightly higher than an equivalent ordinary annuity.
Where would a Nigerian likely encounter an annuity due in real life?
Rent payments due on the first of the month, some cooperative or thrift contributions, insurance premiums, and certain pension or savings plan instalments that are collected at the start rather than the end of each cycle.
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