Repayment Options

The two words loan and repayment are intertwined. One cannot be without the other. One has no existence without the other. Man is born with three debts – being indebted to the Parents, to Society and to Nature. By living out life Man repays these debts by looking after the aged, improving the society into which he or she was born, and allowing Nature to prosper and bloom. If this harmony of give and take is disturbed chaos will break out from which nobody benefits and everybody suffers. It is the same with financial loan. The loan has to be repaid to allow the possibility of future loans and to allow the lender to make an honourable living. Economy benefits from the circulation of money.

It is easy to take a loan but difficult to repay. Taking loans is fast but repaying is time consuming. To repay one has to cut down on many expenses and practice discipline. The repayment amount consists of the loan amount plus the interest on it. The latter is determined by the current market rate. This is the typical pattern of repaying loans.

For convenience the amount is broken up into pieces. The number depends upon the terms of the loan agreement. For instance a loan to be repaid in five years will consist of 60 equal pieces. The repayments may be monthly or quarterly. A monthly repayment scheme makes the load lighter. There is the option that after a certain period the borrower can a make a one time lump sum repayment and clear all dues.

There is another option wherein only the interest is paid. This continues until at a convenient time the borrower at one stroke clears the loan. The monthly repayment scheme is the best because it includes the interest as well as part of the principal. The interest-only scheme increases the cost of the loan. One pays monthly but without the satisfaction of knowing that some pieces of the main loan are being paid off.

The most common repayment vehicles are pensions, endowment policies individual savings accounts. Pensions usually repay mortgage dues. The employer has to bear half the amount of the pension – this is an added advantage. These vehicles are tax-free and thus offer further benefits.

Paying off at one go reduces interest and frees the borrower. But the lender has to give permission for this. Refinancing is another way of repayment that reduces the interest load.