Loan repayment is the process of paying back a loan by making payments. Why do people generally opt for loans? Whether a salaried person or an entrepreneur, there are different reasons for taking up a loan. The purpose and the amount may vary. There are various repayment plans like a monthly, lump sum, or a combination of both. Loan repayment is essential because it allows borrowers to pay off their debt and improve their financial situation.
Timely loan repayments also lead to building a positive credit history for the borrowers, making it easier to get future loans. However, at times it becomes difficult for borrowers to make the payments. In such cases, it is important to get in touch with the lender and discuss ways for deferring or modifying the loan.
One interesting fact!
You can negotiate with the lender to modify the repayment schedule. This comes as a rescue in case you are having difficulty with loan repayments.
What Is a Loan?
A loan is a type of debt that is given by one party (the lender) to another (the borrower). The money that the lender loans to the borrower is usually provided at a cost. The money is basically given on the basis of interest that is charged to the borrower.
Loan Repayment Overview
When someone has availed of a loan and the borrower does not pay back the loan on time, the interest rates will be increased to compensate for the loss of revenue. If the borrower shows a significant lack of payback, the lender can exercise the right to reclaim the loaned property. The loan tenure, interest rate, and repayment schedule are mutually agreed upon by the borrower and lender before the loan amount is finalized.
A repayment schedule determines how interest on the loan is calculated and how long it will take you to pay back the loan. Different types of loans and credit cards have different repayment schedules.
For example, you might borrow 20,000 with an annual interest rate of 6% over five years. Sounds good, right? That’s because your loan isn’t due for repayment until five years.
Post the repayment schedule, you can easily convert your monthly installment into your weekly, bi-weekly, or daily payment. The amount of each installment is generally fixed, meaning it does not change over time. The borrower may also be required to make a lump-sum payment, called a balloon payment, at the end of the loan term.
How does Loan Repayment Work?
For every loan, there is a repayment plan which is decided by the lender and the borrower. The repayment of the loan is scheduled over a period of time which can be anywhere between 12 to 60 months. During this time the payments are made either on a monthly basis or on a quarterly basis or even on a half-yearly basis. The repayment rate is decided based on the size of the loan and the interest rate.
The amount that is borrowed is the principal amount. Each month, a part of the payment in form of installments goes towards the principal and the remaining toward the interest.
Why Is Repayment of Loan Important?
This demonstrates your responsibility as a borrower.
Your timely loan repayments demonstrate to future lenders that you’re a responsible borrower. By doing so, you may be able to qualify for future loans, lines of credit, and even mortgages.
Your credit score is protected.
One of the most important factors in your credit score is your payment history. Staying on top of your loan repayments can help protect your credit score.
In the long run, it saves you money.
Paying off your loan quickly can save you money in interest charges if you have an interest-bearing loan. You’ll pay less interest if you repay your loan sooner.
Your budget will be more flexible.
After you have paid off your loan, you will no longer have to worry about monthly payments. By doing so, you will be able to free up additional funds for savings or other expenses in your budget.
Different Types of Loan Repayment Methods
The most common way to repay a loan is through fully amortizing payments, in which equal payments are made throughout the loan’s term. There are other repayment methods, including interest-only payments, graduated payments, and negative amortization.
| Type | Details |
| Fully Amortising Payments | An amortizing loan is paid off by the end of the loan term with a fixed amount paid each period. Mortgages and other long-term loans typically use this repayment schedule. |
| Interest-Only Payments | An interest-only loan requires the borrower to pay only the interest each month. At the end of the loan period, the principal balance is not reduced, and the loan must be refinanced. Loans with balloon payments at the end of the loan term are most commonly repaid using this repayment schedule. |
| Graduated Payments | Graduating loans start out with low payments and increase over time. It is usually used for student loans, where the borrower’s income is expected to increase over time. |
| Negative Amortisation | In a negative amortization loan, the payments are less than the interest. Over time, the principal balance of the loan increases. It is typically used for interest-only loans where the borrower will refinance the loan at the end of the interest-only period. |
Conclusion
Loan repayment is the process of making payments on a loan over time. When you opt for a loan, you are agreeing to pay back the lender or lender in full. In some cases, you may be able to rework your loan to get the monthly payments more manageable. Loan repayment also helps in building credit history and improving credit scores while gradually paying off debt. Hence, you should consult a legal professional before you change any of the terms of your loan.
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General FAQs
1) What are the four types of loans?
The four types of loans are:
- Personal Loan
- Business Loan
- Home Loan
- Gold Loan
2) What is a loan in simple words?
Generally, a loan is when one or more individuals, businesses, or other entities lend money to other individuals, businesses, or other entities. In this case, the recipient incurs a debt and is usually responsible for both principal and interest payments until the debt is repaid.
3) What are some reasons for individuals to opt for loans?
Motives for Applying for a Personal Loan
- Debt. Consolidation
- Medical Emergencies
- Improving Credit Score
- Financing trip
- Company Expansion
- Building/Renovating home
- Education