Loan Repayment: Types, Payment Schedule and How it Works
22 June 2022
When you avail of credit from a bank or lending institution, you need to repay the amount within the specified period of time. Lenders could levy penalty charges if you fail to repay the loan. For secured loans like home loans, lenders hold the right to seize your collateral if you fail to repay your loan. To avoid any unnecessary trouble, it’s essential to know how loan repayment works.
Read on to know about loan repayment and how it works.
What is Loan Repayment?
Loan Repayment is the act of repaying the borrowed money (with interest) to a lender at a fixed interest rate. Generally, the repayment of the loan is a scheduled process that is completed via monthly EMIs. You should pay all your preset loan EMIs on time to avoid penalties.
How does Loan Repayment Work?
Most loan providers seek that you repay your loans via EMIs – easy monthly installments. EMIs are scheduled monthly on a fixed date until the debt is repaid completely. It is essential to note that the total sum of EMI is not equal to the principal amount as it also includes the interest amount.
Generally, in the initial phases of the loan repayment, the interest rate percentage is higher than what is to be repaid in the upcoming months. This is because the loan amount to be repaid decreases as we pay the EMI every month, making the interest to be paid lesser every month.
Let us understand it by looking at an example. Suppose you have taken a loan of Rs. 1,00,000 with an interest rate of 14.88%. Let us see how loan repayment reduces with time.
Why is Loan Repayment Important?
Once the loan is sanctioned, you have to repay it. You should take the loan repayment process seriously because untimely or late submissions reduce the borrower’s credibility to repay that also significantly impacts future borrowing (by affecting credit score) apart from the current finances through additional levies and penalties. If one does not pay the loan on time, the borrower could be considered a defaulter, and the debtor can seize the pledged assets apart from filing a legal case for non-repayment/police case.
However, those who repay their loans on time are considered credible individuals. Their credit score (CIBIL) increases, and their chances of getting larger amounts of loans in the future increase. One with better credit scores can even negotiate for a better interest rate. That is why it is essential to repay the loans on time. If you want to take a loan, here is the link to the Navi app, as it will assist you in all your loan-related queries. It is a 100% paperless process with quick loan sanctions.
It is one of the commonly used loan repayment options. Every installment is a part of the principal amount and interest rate, which the borrower must pay on time. Some banks also allow borrowers to pre-pay the loan amount. A pre-pay fee may also be charged along with that.
Payment in EMIs is made in two ways:
Half Prepayment: This type of loan repayment happens when the borrower pays off the loan in parts. It saves the borrower’s interest money charged on the interest and principal amount.
Full Prepayment: This method completely pays off your loan before the fixed time.
2. Bullet Repayment
In this loan repayment option, the borrowers must pay the monthly interest. When the time frame for the loan is ended, one bullet repayment helps in paying off the entire remaining loan amount.
How to Calculate Loan Repayments?
To calculate loan repayments, here’s what you have to do:
You would know the Principal amount (P) (credited or borrowed money to be paid), the rate of interest for a month (r), and the number of installments (n).
Use the following formula to calculate the loan repayments in Amortized loans.
A = P [r(1+r)n]/(1+r)n-1
However, if you follow the interest-only loan repayments method, then take the principal amount and multiply it by “r/100”. Then divide this by 12 or the number of installments per year to get the interest you have to pay.
What is Loan Repayment Schedule?
The repayment of the loan is given in the amortisation table above. The table determines the monthly EMI towards the principal amount and interest rate.
Here is the information about the loan repayment schedule.
Loan Information includes the loan amount, time frame, and interest rate.
Payment Frequency – This includes the frequency at which the payments have to be made.
Total Payment – In this, the EMI payable by the borrower is calculated.
Principal Repayment – The amount to be paid and the principal amount are displayed under this term.
Interest cost – The interest payment is tracked every month in this.
A loan repayment schedule is important because it helps the borrowers understand how the loan repayment has to be made. Moreover, the borrower can keep a record of installments that have already been paid. Having a loan repayment schedule beforehand also helps the borrower plan out their finances so that there is no crunch for necessities and there is no delay in repayment of the loan.
Let us now look at how loan repayment impacts the credit score.
The credit health of a borrower depends primarily on the credibility status. There are a few factors that can impact credit health. Here they are:
It is essential to maintain a healthy credit utilization ratio and a repayment history. A positive credit history means the borrower has made the repayments on time.
The credibility of the borrowers is known to all the banks through the credit report. CIBIL – the Credit Information Bureau (India) Limited – compiles a credit score and provides it to banks and other financial institutions as a “CIBIL score” for each individual or enterprise looking to borrow money. CIBIL is only one of the authorized credit organizations in India.
If a borrower has a faulty loan repayment history, banks will not provide loans to such borrowers or charge them very high interest for the amount. This is because they factor in risk the bank or financial institution may have taken in lending to such persons who may default in repayment of loan.
Loan repayment, while mandatory, can be either done as monthly payments called EMIs, or through bullet payments, as per the offer made by the financial organization you are borrowing from. A timely repayment is a crucial way of building your credibility as a borrower. It impacts the credit score and if the credit score is good, you can apply for a loan of a higher amount at possibly better rates too.
If you are searching for a credible loan provider, then Navi could be the right choice for your home and cash loans. Navi provides you with a chance to apply for a loan at low-interest rates. Wish to take a loan? Download the Navi App now and get your loan sanctioned. You can also visit their official website to know more.
FAQs on Loan Repayment
Q1. What is the difference between payment and repayment?
Ans:The payment is made when an individual has to avail of any service. On the other hand, repayment is made when an individual borrows an amount from a lender and the money is to be returned back.
Q2. What is loan repayment?
Ans:Loan Repayment is an act of returning the money taken from the banks or a lender along with a fixed interest rate. The repayment is made in a fixed time period.
Q3. What are the types of loan repayment?
Ans:There are two types of loan repayment, i.e., EMI and Bullet repayment. Out of these, EMI is the most common for loan repayment.
Q4. Can I repay my loan early?
Ans:Yes, you can repay the loan before your fixed period. Paying the loan amount before time could be beneficial. In this way, there is a possibility that borrowers will be charged less interest amount.
Q5. Is loan repayment an expense?
Ans:You complete the loan repayment through EMIs. These EMIs include the portion of the loan amount and interest amount. The interest amount that you are paying is the expense.
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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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