Types of Loan Repayment Plans

There are several types of repayment plans; each has different terms of repayment set forth in the terms of the loan. The different types of loans include interest, repayments, and default. There are four ways in which the debt can be paid back. The first is a single payment of principal and interest at the end of the loan term, the second is interest only, the third is partially amortized with a balloon payment and the fourth and final in fully amortized payments.

Single payment of principal and interest. These types of loans have no regular payments on the principal and/or the interest. These loans are all paid off at once at a date specified in the future. That one payment includes the principal amount and the accrued interest.

Interest only loan offer buyers increased purchasing power, and increased cash flow. This is a popular alternative to a fixed-rate traditional loan. This loan calls for regular interest payments during the term of the note. The interest rate is generally higher on these loans and the principal amount of the loan does not decrease. At the end of the term a large payment is made to pay off the balance of the loan and any interest that may still remain. This is ideal for a family only looking to stay in a home for a few years. If the buyers were looking to stay in the home only 3-5 years this loan would be ideal. In a conventional 30 year loan the buyer will make payments on the principal and interest, which will make the monthly payment higher then an interest only where you do not pay on the principal

Partially amortized payments are used to create lower payments. The partially amortized note calls for regular payments on the principal and interest during the term of the loan. Since this loan is only partially amortized then there will still be a balance remaining at the end of the term. The balance remaining will have to be paid off in what is called a balloon payment at the end, which is a much larger payment that is due. This causes extra risk because the borrower might have to refinance in order to pay back the balloon at the end of the term.

With amortized payments the loan is repaid in equal payments, usually on a monthly basis. This occurs until the loan is repaid in full. These regular monthly payments include both the principal and interest, which will pay off the debt completely at the end of the loan. This type is fully amortized because the debt is completely paid off with the last payment. Amortization is the process of liquidating your financial obligation through payments.

When looking into options on re-payments it is best to consult with a Realtor to find out what types of repayment plan works best for your family and your situation.