compare the three loan repayment plans at a glance. learn the differences between prepayment, amortization, and equalization, compare total interest, and get a guide to choosing the right repayment plan for you.
comparing loan repayment plans at a glance Find the right one for you
what are loan repayment plans?
when you take out a loan, you're required to pay back the principal and interest in a certain way. there are three main types of loan repayment plans: amortization, equalization, and principal amortization. Each plan has different monthly payments and total interest charges, so it's important to choose the one that fits your financial situation. whether it's a mortgage or a credit card, the repayment method can make a difference of hundreds of dollars in interest.
features, pros, and cons of balloon payments
what is prepayment?
a balloon payment is when you make interest-only payments over the life of the loan and then pay off the entire principal amount in one lump sum on the maturity date. typically, the maturity is short, one to three years, and the terms often change to a combination of principal and interest payments after maturity.
pros
the lowest upfront payment since you only pay interest each month. This can be a favorable option for those with tight cash flow right now.
the downside
the total interest burden is the highest of the three because you don't pay off any principal. You also have to have a lump sum of money available at maturity.
amortization features and pros and cons
what is amortization?
equalized payments are equal monthly payments of the loan principal divided by the term of the loan. Interest is calculated and paid only on the remaining principal.
advantages
the total interest on your loan is the lowest of the three. it's the most economical in the long run because as your principal decreases over time, so does your interest burden.
the downside
higher monthly repayments at the beginning due to the large amount of principal remaining. this is only an option if you can afford the loan at the beginning.
amortization features and pros and cons
what is amortization?
an amortization plan divides the total principal and interest amount of a loan into equal monthly payments over the life of the loan. the interest portion is higher in the early years and the principal portion is higher toward the end.
pros
you pay the same amount each month, making it easier to budget. it's a more stable financial plan with a lower upfront cost than amortization.
cons
higher total interest burden compared to amortization. since you're paying mostly interest in the early years of your loan, you'll see your principal decline more slowly.
compare loan repayment options at a glance
category | Amortization | Amortization | Principal Amortization | Principal Amortization
monthly payment | Interest-only payment | Higher initially and decreases gradually | Same every month
total Interest Burden | Highest | Lowest | Medium
initial burden | Lowest | Highest | Medium
manage your budget | Need to prepare for maturity | Need to manage fluctuations | Most convenient
recommended for | Short-term savers | Those looking to reduce total interest payments | Stable repayments
when calculating your loan interest, remember that amortizing the principal is the most favorable for total interest savings.
recommend a loan repayment plan that's right for you
choosing a loan repayment plan depends on your personal financial situation and goals.
if you're short on funds right now, choose an amortization payment to reduce your upfront costs. however, it's important to have a plan in place to pay off the principal at maturity.
if you're looking to reduce the total interest on your loan, amortization is the answer. it's the most affordable option in the long run, even if you have to pay more upfront.
if you're looking to manage your budget with a consistent amount of money each month, amortization is for you. it's also a favorite among salaried borrowers.
common questions
Q1. Can I change my loan repayment plan midstream?
A. It depends on your lender, but most do. however, fees may apply and terms may change, so check beforehand.
Q2. Which repayment plan pays the least amount of interest?
A. An amortizing payment plan has the lowest total interest burden. this is because you're paying off a steady amount of principal each month, so you're paying less interest on the remaining principal.
Q3. What are the most common repayment plans for mortgages?
A. The most common repayment plan for mortgages is an amortization plan. it's preferred because it allows for a stable repayment plan over the long term.
Q4. What if I can't get an extension after prepayment?
A. If you are unable to extend your maturity, you can either make a lump sum repayment of the principal or take out a refinancing loan with another financial instrument. we recommend that you make arrangements well in advance of the maturity.
Q5. Where can I calculate the interest on my loan?
A. You can easily calculate the principal amount of your loan on each bank's website or the Financial Supervisory Service's financial calculator.
conclusion
the key differences between the three loan repayment options are the shape of your monthly payments and the total interest burden. choose wisely based on your affordability and financial goals.
if you found this article helpful, let us know what you think in the comments and subscribe to our blog - we'll be back with more useful information on loans.