Introduction
Repayment methods determine how principal and interest payments are structured during origination. Proper configuration ensures borrowers understand their payment obligations and lenders can effectively manage cash flow. Choosing the right method aligns with loan terms, underwriting strategies, and borrower needs.
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Repayment Methods
Each repayment method offers different benefits based on borrower and lender needs.
Borrowers make payments covering only the interest, with no reduction in principal. This option provides lower initial payments and is often used for short-term or investment loans.
Standard repayment structure where each payment includes both principal and interest. Borrowers can select either:
Fixed Amortization: Monthly payments reduce principal at a consistent rate.
Fixed Payment: Monthly payments remain stable, with interest recalculated based on the remaining balance.
Unpaid interest is added to the loan balance rather than being paid immediately. This is common for construction loans or periods of deferred payments.
Reminder: Capitalizing interest increases the total loan balance over time and may impact long-term repayment costs.
All interest payments are postponed to a later date. Borrowers can either add accrued interest to the principal or pay it in a lump sum at a specified time.
Important: Deferring interest can lead to higher overall loan costs. Ensure borrowers understand repayment obligations and potential financial impact.
FAQs
Which repayment method is best for my loan?
The best method depends on the borrower’s financial goals, cash flow, and loan structure. Interest-only options reduce initial payments, while principal & interest ensures steady repayment.
Can repayment methods change after origination?
Yes, but changes may require loan modifications or amendments to borrower agreements.
How does capitalizing interest affect loan repayment?
Since unpaid interest is added to the principal, future interest calculations will be based on a higher balance, increasing the total cost of the loan.
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