Whenever any party has obtained a loan, they are usually required to pay back the money within a specific duration. This duration could be from days to weeks, months, and years. The due date for paying a loan is the payment deadline. Often, a payment deadline is set in a time frame that suits them. Your agreement with the second party will determine how you act when payment deadlines occur.
Many loans are paid using a series of payments over an extended period. At times, the borrower will make an initial payment or deposit before splitting the remaining cost into installments. But in some other scenarios, the entire loan is divided into installments. Each installment payment is referred to as the principal. These payments usually include an interest computed throughout the loan plus the unpaid balance of the loan.
There are two types of payment deadlines that can be adopted to pay back a loan;
- Even Principal Payments
- Even Total Payments
Even Principal Payments
For this type of payment deadline, the size of the principal is the same throughout. It can be calculated by dividing the cost of the original loan by the number of payments you are expected to make. For instance, if a $10,000 loan is divided into 20 payment periods, that will equal $500 per period. The unpaid balances will calculate the loan at the end of each payment period. When you consider that the outstanding loan decreases after every payment period, you will realize that the interest on the loan will also decrease gradually. As a result, this will lead to a decrease in the total amount paid at every installment. Here, the only thing that’s even is the amount of capital produced during each installment.
Even Total Payments
The even total payment system comprises a decreasing interest payment and increasing capital payment. An increase matches the decrease in interest payment and increases in capital payment in the size of capital payment. By doing this, the total amount for each period remains constant.
There are certain times when the terms of loans will include a balloon payment. When using this structure, the loan balance will be due after some of the annual payments have been made. For instance, the remainder of a loan of $50,000 may become owing after making five consecutive payments. With this term, borrowers can save themselves from paying the remainder of the interest by clearing the rest of the loan at once.
This type of provision is used and quite important to deal with temporary financial incapability to settle lump sum loans. For instance, a business may have limited capacity to repay their loans in the early years of obtaining them. But after several years of operation, it may have recovered and regained the ability to clear the financial obligation. If they had included a balloon payment proposal in the contract, they would be able to remove the loan balance without waiting till the payment deadline.
Based on what we have learned, the Even Principal Payment system involves splitting the remaining portion of the loan into equal principal. In contrast, Even Total Payments features a design where each installment is made up of decreasing interest payment and increasing capital payment. For both payment deadlines, the unpaid balance reduces gradually.