Repayment
Candlefocus EditorRepayment of a loan begins as soon as the loan is disbursed. At this point, the borrower's monthly payments are mostly comprised of interest, with a smaller portion of principal. One typical repayment option is an amortizing loan, where the payment amount remains consistent and the length of the loan is fixed. Throughout the loan period, the interest portion of each payment decreases as the principal amount is appropriated. In the end, the borrower will have paid back the full amount of the loan to the lender.
In the event of a borrower’s hardship, there may be several options to help during repayment. These may include forbearances, loan deferment, and loan consolidation. A forbearance allows for a pause in the payments for a few months, during which the lender does not charge any interest. This is an appropriate step for a borrower who knows the difficulty will be temporary. For student loans, loans with the US Department of Education, income-driven payment plans, student loan forgiveness and cancellation, and other flexible repayment options may be available.
With mortgages, a borrower can also seek alternatives such as refinancing, modifications, and repayment plans. Modification of an existing mortgage loan is a process that allows the lender to adjust the original terms of the loan and to reduce their risk of default. Refinancing a loan involves replacing the current loan with a new one offering different terms, at a potentially lower rate of interest. This provides an era of relief repayments that allows a borrower to adjust their budget and pay off the loan comfortably.
In general, regardless of the type of loan, making regular payments on time is the most reliable way to meet the contractual obligations of a loan in a timely manner. With a solid repayment strategy, a borrower can make sure they are able to pay off the entire loan amount over the course of the loan period.