What is Loan Repayment and How Does it Work?

A loan can be a boon to those who need financial help and availing a loan automatically implies that it should be repaid along with the decided interest rate. Read to know what loan repayment is and how it works.

What is Loan Repayment?

Returning the loan amount borrowed to the lender is known as loan repayment. But first, let us take a look at what loans are.

What are Loans?

A loan refers to a sum of money that is lent by banks, NBFCs or other lenders to a borrower with the intention of receiving it back with interest over a period of time. Loans can be secured or unsecured. Secured loans are those that require a collateral or security in order to be disbursed. For example, if you wish to avail a home loan, the house in question will be in the lender’s name until the loan has been fully repaid.

Unsecured loans are those that do not require collateral or security for disbursal such as personal loans.

How Does Loan Repayment Work?

The act or process of repaying the borrowed amount to the lender is known as loan repayment. When a lender provides a loan to a customer there is inherent risk involved. In order to mitigate this risk, an interest rate is imposed on the loan. The customer will have to pay back the loan in installments known as EMIs or Equated Monthly Installments. EMI consists of a portion of the principal amount that is borrowed along with interest amount.

Basically, EMI = Principal Amount + Interest Amount

It is interesting to note that the principal amount and interest amount are not equal in an EMI, in fact during the initial loan repayment period, the interest amount will be higher and will reduce as the repayment term progresses and the principal amount increases. Additionally, the EMI amount can also be fixed or floating. Fixed EMI payments are when the amount to be paid does not vary during the loan repayment term. When it comes to floating (also known as variable or flexible repayment) options, the EMI amount may vary depending on the market value and other fluctuations.

Availability of a loan is an act of responsibility as it is understood that the amount will have to be repaid. There are a number of loans available in the market today with differing terms and conditions. Customers will have to choose a loan that suits their requirements and ensure that the loan repayment is done on time. If you are looking for a personal loan at competitive rates and advantageous terms and conditions, visit the Moneyview website or download the digital lending app to apply today.