Loan Repayment

Loan repayment is being subject to obligation of repaying the amount within a predetermined length of time, when someone applies for any kind of credit. Borrowers are subject to extra costs on top of the existing debt if they do not comply with this requirement.

In most cases, the repayment method involves following a predetermined plan, referred to as the loan repayment schedule, and making payments in the form of equivalent monthly installments, or EMIs. These payments consist of the principal and the interest, which are due at predetermined intervals over the loan term.

Loan repayment is a process of paying back an amount obtained from a lender in addition to the interest accrued on loan. On the other hand, failing to return a loan on time or not repaying it is a sign of poor debt management abilities, which can also lead people into debt traps.

One of the most common ways of paying off loans is through Equated Monthly Instalments. In this method, the loan's total amount is repaid through several predetermined installments. These payments include both the principal and the accrued interest on the loan. EMI payments are planned to take place on a specific date each month (the loan repayment schedule), and this will continue to happen until the term expires and the debt is paid off as a whole. However, be aware that the percentages of principal and interest included in an EMI are not always the same.

Primarily, a more significant proportion of interest will be included in the EMI during the first portion of the tenor. The interest component will eventually decrease while the principal component will progressively rise.

Loans with no requirement to make payments toward the principal during the first few years are known as interest-only loans. However, when you have an amortized loan, you make payments toward both the principal and the interest over the loan's term.

1. Formula of Amortized Loan Payments

Principal balance or total loan amount (a), the periodic interest rate (r), which is the yearly rate divided by the number of payment periods, and the total number of payment periods (n) should be used to calculate the monthly payment, which is denoted by the letter "P."

P= a / { -1} /

2. Formula for an Interest-Only Loan

The formula of loan repayment in the case of an interest-only loan is simple. First, the yearly interest rate, r, is divided by the payments made yearly, n. Then, multiply that result by the total amount availed by the borrower, a.

P = a(r/n)

There are several distinct approaches to calculating your monthly payments. This is because the payments for various kinds of loans focus on express amounts owed.

Let's say Mr. X wants to borrow $200,000 at a rate of 12% for 25 years with monthly payments due back to him. To get the amount to be paid each month, Mr. X will first convert percentages to decimal notation and apply the following:

a: The loan is for $200,000,

r: 0.01 (12% annual rate, or 0.12, divided by 12 monthly payments yearly),

n: 360 (12 monthly payments per year times 30 years)

P= a / { -1} /

200,000 ÷ { - 1 } ÷ = $2005.51

The cost of the payment per month is $2005.51.

Let us look at the following examples to understand the loan repayment concept better.

Example #1

Using the example of Mr. X in case he took a $100,000 loan with a 6% interest rate and considering it is an interest-only loan, the computation would look like this:

a: the total amount of the loan is $100,000

r: the interest rate is 0.06% (6% written as 0.06)

n: 12 (based on monthly payments)

P = a(r /n)

= ( 100,000 * 0.06 ) / 12

= 500

Example #2

Forbes published an article on the proposed adjustments to the terms of student loan payments and interest rates for 2023. These alterations resulted from the decision made by the Biden administration. It was decided to prolong the moratorium on student loan repayments, interest, and collections into 2023. In the past, it had been anticipated that interest payments would resume in January 2023. This indicates that the estimated date for the resumption of payments on student loans is no later than sixty days after June 30, 2023.