A loan is very useful for people who need financial aid. When you repay your loan, you will have to do it along with the required interest rate. What is the loan repayment schedule and why is it important? Let us read on to find out.
What Are Loans?
Before going into what loan repayment is, let us understand what loans are. A loan is an amount of money that one or more individuals or establishments borrow from banks or other financial lending institutions so as to manage planned or unplanned financial events. When a borrower procures a loan, he incurs debt which he has to repay along with interest within a period of time.
What Is Loan Repayment? How Does It Work?
Loan repayment works in the following ways:
- When the lender gives a loan to the borrower, there is an element of risk involved. In order to deal with this risk, an interest rate is charged on the loan.
- The customer will have to pay back the loan in monthly installments known as EMIs or Equated Monthly installments.
- EMI = Principal Amount + Interest Amount
- The principal amount is not equal to the interest amount in an EMI.
- The EMI may also comprise of other smaller elements such as insurance and service charges according to the terms and conditions.
- During the initial loan repayment period, the interest amount will be higher and will reduce as the loan tenure progresses.
- During the initial loan repayment period, the principal amount is lower and increases as the loan progresses.
- EMI payments may be fixed or floating. Fixed EMI amounts are those that remain the same during the repayment period. Floating EMIs vary according to market value and other varying factors.
- When you take a loan, you should repay it back to the lender within the specified time period.
Why Is Loan Repayment Important?
Loan repayment determines your financial discipline. If you repay your loans on time, then you will have a good credit score and a credit history. Defaulting on Loan EMIs reduces your credit score and if you accumulate debts, it will even lead to bankruptcy over a period of time. If you want to build a good credit history from scratch or maintain your credit score, you need to repay your loan on time.
What Is A Loan Repayment Schedule?
Repaying a loan through a sequence of scheduled payments known as EMIs that include the principal amount outstanding and the interest is known as the loan repayment schedule. It is also known as an amortization table.
Also Read: Complete Guide To Business Loan Repayments
What Are The Components Of A Loan Repayment Schedule?
The repayment schedule of the loan is given in the amortization table. The lender shares this table with the borrower. The components of this table are computed using a loan amortization calculator. The borrower can find out how much he can pay towards the principal outstanding and the interest by looking at the amortization table. Your repayment schedule has the following information:
Information about the loan:
When you use the loan amortization calculator, you will be able to key in information like the complete loan amount, duration of the loan, and the interest rate. The amortization computations are based on these factors:
This is the first column of your loan repayment schedule. It specifies the frequency at which you will have to pay the lender. The most important is the monthly payment cycle.
This column specifies the total monthly EMI that the borrower has to repay.
If the borrower has access to excess funds, he will be able to pay more towards the loan. The loan amortization calculator automatically computes the subsequent interest payments based on the additional amount paid. The new balance amount is also calculated and this updated balance will be listed under this section.
This is the amount that you will pay towards the principal amount every month. This will be displayed under the principal repayment column of the repayment schedule. This will increase as the loan progresses.
The interest to be paid every month is tracked under this column of the table. This component generally decreases with the loan tenure.
Outstanding balance will be calculated by subtracting the monthly principal payment from the total loan amount due.
Why Is the Loan Repayment Schedule Important?
The loan repayment schedule is important for the following reasons:
- It helps borrowers to understand the components of loan repayment by breaking it down into columns.
- The borrower can keep track of the money he pays towards the principal and interest amounts.
- The repayment schedule also updates the outstanding balance on the loan after the individual makes the monthly payment.
- The repayment schedule will calculate the interest payable in future if part prepayment is done.
- It calculates the total interest payable in a year towards a loan, and this will help the borrower to claim tax.
While loans provide us with a lot of advantages, you have to make sure to repay them. Also, when you choose a loan, do a lot of research and opt for the one that is best suited for you.
FAQS What Is A Loan Repayment Schedule And Why Is It Important?
1:What is the significance of loan repayment?
Loan repayment should be taken seriously since timely repayment of EMIs reduces not only your debt but also the interest accrued. It also gets reflected in your credit history.
2:What is the importance of the amortization schedule?
An amortization schedule shows the payments made towards principal and interest and hence the total payment made towards the loan. The amortization schedule clearly indicates the principal and the interest components of each periodic payment.
3:How do I make a loan repayment schedule?
Take the total loan amount in month one and multiply it by the interest rate on the loan. Then, for a loan with monthly repayments, divide the result by 12 to get your monthly interest. Subtract the interest from the total monthly payment, and the remaining amount is what goes toward principal.
4:What are some of the common loan repayment methods?
- Delayed EMI payments: The borrower is not required to pay loan EMIs for a certain period of time at the beginning of the repayment tenure.
- Step-Down/flexible repayment plan: As the loan tenure progresses, the EMI amount decreases.
- Step-Up repayment plan: The EMI amount increases as the loan progresses and it will be less in the initial years.
- Loan foreclosure: In this type of repayment plan, a lump sum can be paid after paying a certain number of EMIS. In this way, you can completely repay the loan amount. However, this is subject to certain terms and conditions and may lead to the borrower paying a penalty.
5:What is a loan repayment schedule called?
A loan amortization schedule is a table that shows each periodic loan payment that is to be made monthly. It also shows how payment should be made towards the principal and the interest.
6:What is the meaning of loan repayment?
Repayment of loan means paying back the amount borrowed from a lender. Repayment conditions on a loan are given in the loan's agreement which also includes the interest rate. Some loans which individuals end up repaying are personal loans, home loans, and educational loans