A loan repayment comprises an interest component and the principal component. For accounting purposes, the interest portion is considered as an expense, and the principal portion is reduced from the liability and tagged under headings such as Loan Payable or Notes Payable.
Loan Repayment must be taken seriously by borrowers since it helps to reduce one’s loan liability and also the total interest accrued. Loan repayment track record also gets recorded in your credit history. Borrowers may have to face immediate financial implications in terms of higher interest component for missed loan repayments. When it comes to long-term implications on one’s credit health, loan repayment plays an important role. Some borrowers treat loan repayment as an avoidable expense while serious borrowers treat it as an obligation to safeguard their credit history.
Types of Loan Repayments
EMIs - Equated Monthly Instalments or EMIs, are commonly used as a loan repayment option. Every instalment comprises a part of the principal and a portion of the interest. EMIs are often scheduled to be paid every month over a fixed loan tenure.
Bullet Repayment - Some loan products and lenders may allow borrowers to repay the loan through the bullet loan repayment method. In this, a borrower needs to pay only the interest portion every month. At the time that the loan tenure comes to an end, the borrower needs to make one bullet repayment to pay off the entire principal loan amount.
Loan repayment must be set as a priority while managing the expenses. This way, a borrower can improve credit track record and fetch better lending terms from banks in the future.