Full repayment is a loan repayment schedule that targets each monthly payment to cover a portion of the principal and a portion of the interest. If the borrower pays all loan installments according to the terms, the loan balance will be completely repaid when the final payment is made.
Definition and Example of Full Repayment
Whenever you take out a loan, you will want to know if your repayment schedule is based on a full repayment plan. The term “repayment” means making regular payments of the same value over a specified period so that each payment reduces the total balance of the loan.
When you have a full repayment arrangement, it means that each scheduled payment you make works to reduce the balance of both the principal (the borrowed amount) and the interest (the cost of borrowing) over the life of the loan. In the case of a mortgage loan, this means that once you make the final payment, the loan will be fully repaid, and the remaining amount due will be 0. You will have fully paid off your mortgage loan – both the principal and the interest.
Note: Loans with partial repayment schedules are primarily directed toward interest rather than principal. With this type of loan, a large payment is made ultimately at the end.
Determining the percentage of the full payment that goes to the principal and the percentage that goes to the interest depends on the repayment schedule of your particular loan. Borrowers can use this schedule as a visual guide to track the progress of their loan repayment.
There are many types of loans that utilize a full repayment plan. Among the most common examples are auto loans, mortgage loans, and personal loans.
How Does Full Repayment Work?
Full repayment works by distributing the loan over a series of equal monthly payments over a specified time frame. Each payment applies a portion to the principal and a portion to the interest.
During the early stages of the repayment schedule, a larger portion of the payment is used to cover the interest. However, as the loan continues to be paid off over its life, the amount directed towards the principal increases.
The good thing about the full repayment structure is that each monthly payment reduces the outstanding balance so that the loan is fully repaid by the end of the repayment schedule.
Note: If you wish to shorten the repayment period and pay off a mortgage loan earlier, you may want to make additional payments towards the principal, switch to bi-weekly payments, or refinance to a shorter-term loan.
Here’s an example of what a full repayment schedule might look like. The formula for calculating monthly payments is:
M = P[r(1+r)^n/((1+r)^n)-1)]
Where:
M is the total monthly mortgage payment.
P is the principal amount of the loan.
r is the monthly interest rate (the annual rate divided by 12).
n is the number of payments over the loan term. If you have a 30-year loan, you have 30 × 12 = 360 payments.
Let’s say you borrowed $200,000 for a 30-year mortgage at an interest rate of 3.5%. Your monthly payments would be $898.13.
M = $200,000[0.002917(1.002917)^360/((1.002917)^360-1)]
= $200,000[(0.008324)/(1.85363)]
= $200,000(0.00449)
= $898.13
As can be seen from the repayment schedule below, the larger portion of each monthly payment is used to pay off the interest at the beginning of the loan. At the end of the loan, the larger portion of each payment covers the principal amount, with only a small part going to the interest.
As long as you stick to the repayment schedule, the loan will be fully repaid at the end of the term as this schedule uses full repayment installments.
Full Repayment vs. Partial Repayment
Whenever you take out a loan, both the principal and the amount of interest must be repaid. The difference between a full repayment plan and a partial repayment plan is the ratio of the amount of principal to the interest that is paid over the life of the loan.
With
The full payment plan allocates each monthly payment a part of the amount towards principal and interest. Thus, in the early stages of the loan, a larger percentage of each payment is directed towards interest. However, the roles reverse towards the end of the loan, and the principal receives the larger percentage. As a result, if you make each payment according to the schedule, the loan will be fully repaid when the last payment is made.
With partial repayment, only a portion of the loan is paid off. This means that only a part of the principal will be repaid by the end of the term, leaving you with an outstanding balance. At this point, to repay the loan, you will either have to make a large lump sum payment (known as a balloon payment), refinance, or take out a completely new loan.
Payments can also be interest-only. With this type of loan, the principal is not repaid during the repayment period. The borrower essentially pays the interest on the loan until it matures. Once this happens, the entire principal amount becomes due as a large lump sum payment. These loans are also known as interest-only loans or single payment loans.
Takeaway
Full repayment refers to regularly scheduled loan payments that reduce both the principal and interest of the loan over a specified period of time. Full repayment payments tend to go more towards paying off interest first and target the principal near the end of the loan. Each full repayment allows the borrower to reduce the loan balance closer to zero so that the balance is fully paid off at the end of the loan term.
Some common types of loans that utilize full repayment payments include mortgage loans such as mortgages, auto loans, and personal loans.
Source: https://www.thebalancemoney.com/what-is-a-fully-amortizing-payment-5209461
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