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Devising Newer Ways of Repayment
How good would it have been had there been no obligation to repay the loan or
mortgage? This is what most people think when required to make the monthly
repayments. But try as much as they can, they are never able to change the
situation.
The borrower has to cut his monthly expenses to provide for the repayment.
The amount to be repaid includes the principal amount of the loan and the
interest calculated based on the rate of interest prevailing in the market. This
is the traditional method of repayment.
The loan amount is broken into a number of small parts for an easy repayment.
The number of parts corresponds with the term of repayment. Thus, if the loan or
mortgage is to be repaid in a period of five years, the number of equal parts of
the loan will be 60. The repayments are to be made on a monthly or quarterly
basis.
An improvement in the method above was made to reduce the burden of a
borrower. The borrower is required to pay regular monthly installments as in the
earlier method. After a certain number of installments the borrower can pay the
remaining balance of the loan with a single balloon payment.
An alternative of the traditional method of repayment is an interest only
repayment. In this type of repayment, the borrower is required to pay only the
interest. At the end of the term of repayment or any particular time period
desired by the borrower, the balance on the loan is repaid in full.
The monthly repayment in the interest only method is far lesser than in the
former method. This is because the monthly repayment in case of the former
includes both principal and interest. It is on this count that people prefer to
repay through the interest only method. However, this method of repayment
increases the cost of the loan.
A
Repayment vehicle is created to repay the loan or mortgage at the end of the
term of repayment. The borrower is required to pay a monthly figure into the
repayment vehicle.
Pensions, endowment policies, and individual savings account are the most
important repayment vehicles. Pensions are widely used for repayment of the loan
or mortgage amount. An added advantage in case of the pension policy is that the
employer pays half of the amount of pensions. Thus effectively speaking, the
borrower spends only half the amount in the repayment. Being tax free, these
repayment vehicles offer a cheap means of repayment.
Another method of repayment which is not very popular but can be used for
short term loans is the payment of principal and interest in one installment.
This is helpful for people who need funds during contingencies. They can pay off
the loan when the situation improves. An advantage of this type of loan is that
the interest cost is lesser.
If you find that the methods discussed above are rigid as to the amount of
monthly installments and the mode of repayment, then the equal principal
payments will be helpful. The interest in this method is calculated in declining
balance method. Thus, it means that the repayments change every month according
to the reduced balance.
Early or premature repayment of the loan or mortgage (if permitted by the
lender) is another repayment method. Before signing any documents for loans and
mortgages, one must see properly if the lender does not prohibit early repayment
with a penalty clause. Refinancing a loan or remortgaging a mortgage can help
customers get rebate for early repayment. These transfer the loan or mortgage to
another lender. So the borrowers can benefit from a lower rate of interest and a
rebate for early repayment.
Whatever be the method chosen, the ultimate end of it would be the repayment
of the loan or mortgage in full. All forms of repayment have their respective
pros and cons. A perfect match between the pros and cons of the repayment
methods and the individual financial condition must be established in order to
derive the best method of repayment. There is not always an easy return from a
particular method of repayment. A wrong repayment method can be precarious to
ones financial health.
Andrew baker has done his masters in finance from CPIT. He is engaged in
providing free, professional, and independent advice to the residents of the
UK.He works for the personal loan web site
http://www.ukfinanceworld.co.uk for any type of uk secured and unsecured
loan please visit
http://www.ukfinanceworld.co.uk
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