Loan repayment is the act of making payments on a loan. This can be done 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.
Making timely loan repayments can also help borrowers build a positive credit history, making it easier to qualify for future loans. In addition, repaying loans can help reduce stress and anxiety levels and improve one's overall financial well-being. Assuming all other factors are equal, repaying a loan in full and on time is always the best option. However, life happens, and sometimes borrowers may find themselves in a position where they can't make payments. In these cases, it's essential to contact the lender as soon as possible to discuss options for deferring or modifying the loan.
Did You Know? One interesting fact about loan repayment is that you can negotiate with your lender to change the repayment schedule. This can be helpful if you are having difficulty making payments.
What Is a Loan?
A loan is a type of debt that an individual or organisation borrows from a lender and then repays over time. The loan may be for a specific purpose, such as to purchase a home or vehicle, or it may be a general-purpose loan that the borrower can use at their discretion. The loan terms, including the interest rate and repayment schedule, are agreed upon by the borrower and lender before the loan is finalised.
Many different types of loans are available, from short-term payday loans to long-term mortgages. The type of loan that is best for a borrower depends on their individual needs and circumstances. For example, someone with poor credit may only qualify for a high-interest loan, while someone with good credit may be able to get a lower-interest loan.
The repayment schedule for a loan is typically set up so that the borrower makes regular payments, called instalments, over the life of the loan. The amount of each instalment 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.
Loans can be important for individuals and businesses to finance big purchases or cover unexpected expenses. However, loans must be repaid, and if borrowers cannot make their payments, they may face serious consequences, such as damage to their credit score or even foreclosure. Therefore, it is essential for borrowers to carefully consider their options and only take out loans that they are confident they can repay.
Also Read: Need, Benefits and Importance of a Business Loan
What Is Loan Repayment?
Loan repayment is making payments on a loan, typically in periodic instalments, to repay the principal balance and interest owed. Loan repayment typically begins after a grace period, a set period during which the borrower is not required to make payments on the loan. The grace period typically lasts for six months, for example - after the borrower graduates from college or university or when they first begin to work full-time. After the grace period, the borrower must begin to make monthly payments on the loan. The monthly payment amount is typically determined by the loan repayment plan that the borrower chooses.
Several different repayment plans are available, including the standard repayment plan, the extended repayment plan, the graduated repayment plan, and the income-based repayment plan. The standard repayment plan requires the borrower to repay the loan within ten years, and the extended repayment plan allows the borrower to extend the loan repayment period to 25 years. The graduated repayment plan starts with lower monthly payments that increase every two years. The income-based repayment plan sets the monthly payment amount based on the borrower's income and family size.
How does Loan Repayment work?
There are a few things to know about how loan repayment generally works. First, you will have to make payments on your loan each month. The amount you pay will depend on the interest rate, the term of the loan, and the amount you borrowed. You will also be responsible for paying any fees associated with the loan.
The interest rate on your loan will determine how much you will pay in interest each month. The term of the loan is the amount of time you have to repay the loan. The longer the period, the lower your monthly payments will be, but the more interest you will pay over the life of the loan.
The amount you borrowed is the principal. Each month, a portion of your payment will go toward the principal and the rest toward the interest. As you make payments, the loan amount you owe will slowly decrease.
Loan repayment can seem daunting, but it is essential to remember that you have options. If you are having trouble making payments, you can contact your lender to discuss your options. You may be able to extend the loan term, which will lower your monthly payments. You may also be able to refinance the loan, which could lower your interest rate and monthly payments.
Also Read: Types of Loan - What are different Types of Loan in India?
Why Is Repayment of Loan Important?
There are a few key reasons why repaying your loans is essential:
1. It Shows that You’re a Responsible Borrower.
When you make timely loan repayments, it demonstrates to future lenders that you’re a responsible borrower. This can make qualifying for future loans, lines of credit, and even mortgages easier.
2. It Protects Your Credit Score.
Your payment history is one of the most significant factors in your credit score. You can help protect your credit score from damage by staying on top of your loan repayments.
3. It Saves You Money in the Long Run.
If you have a loan with an interest rate, repaying your loan quickly can save you money in interest charges. The sooner you repay your loan, the less you’ll ultimately pay interest.
4. It Frees Up Money in Your Budget.
You will no longer have a monthly loan payment to worry about once you have paid off your loan. This can help you free up funds in your budget for other expenses or savings goals.
Also Read: How to get an MSME loan without collateral?
Types of Loan Repayment Methods
The most common type of loan repayment is the fully amortising payment, in which equal payments are made throughout the life of the loan. Other repayment methods include interest-only payments, graduated payments, and negative amortisation.
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Fully Amortising Payments:
With a fully amortising loan, the borrower pays a fixed amount each period, and the loan is fully paid off by the end of the loan term. This repayment schedule is typically used for mortgages and other long-term loans.
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Interest-Only Payments:
An interest-only loan requires the borrower to pay only the interest on the loan each period. The loan's principal balance is not reduced, and the loan must be refinanced at the conclusion of the loan period. This repayment schedule is most commonly utilised for loans with balloon payments after the loan term.
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Graduated Payments:
With a graduated loan, the payments start low and increase over time. This repayment schedule is typically used for student loans, where the borrower's income is expected to increase over time.
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Negative Amortisation:
With a negative amortisation loan, the payments are less than the interest on the loan. As a result, the principal balance of the loan increases over time. This repayment schedule is typically used for loans with an interest-only period, where the borrower is expected to refinance the loan at the end of the interest-only period.
Also Read: Consumer Durable Loan - List of Leading Banks Offering Consumer Durable Loans
Conclusion
Loan repayment is the process of making payments on a loan over time. Loan repayment typically occurs in monthly instalments, and each price goes toward the principal (the amount borrowed) and the interest (the cost of borrowing the money). Loan repayment is essential because it allows borrowers to gradually pay off their debt while building up their credit history and improving their credit scores.
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