Repayment loans can take many forms: there are repayment mortgages, where the monthly repayments gradually repay the capital amount borrowed as well as any accrued interest. The longer the mortgage is in operation, the greater the equity percentage will be in the property, until at the end of the mortgage term the full amount of the debt will have been repaid.
This kind of loan repayment is advantageous in that it removes the risk of having an investment vehicle in place, such as an endowment policy, which, if it performs badly, will not succeed in repaying the borrowings in full. Also, as the mortgage balance is reducing each month, there is less chance that the borrower will suffer from negative equity.
However, in the early years of the mortgage, the majority of mortgage repayments consist of the interest component, and therefore not much of the capital is actually paid off for some time.
Repayment loans can also be in the form of secured or unsecured personal loans, which could be for home improvements, a car, holiday, debt consolidation or many other things. Secured loans are secured against a property or other asset, while with unsecured loans there is no security offered as a guarantee to the lender. As an unsecured loan represents a greater risk to the lender than a secured one, they tend to be more expensive, for smaller amounts of money, and for a shorter borrowing term.
Most such loans are inflexible, in that the monthly repayment remains the same throughout the repayment period, which is set at the inception of the loan. However, some flexible repayment loans are also available, with flexible repayment options, where typically you can borrow and pay back at any time during the loan term as long as you keep to the agreed credit limit.
One type of loan that has had a lot of publicity in recent years is the repayment student loan. These loans are intended to help students pay for college tuition, course materials and living expenses. Student loans are a government-backed scheme and the interest rate is substantially lower than most loans in the marketplace. Repayment of loans is not usually required while the student is studying.
By Ben West