What is Repayment?
How Does Repayment Work?
Under the terms of a loan, repayment can have different schedules and requirements. For example, a loan may be amortized over a specific period of time, requiring regular repayments. The repayments would be divided between the interest (i.e. the interest on the outstanding loan amount) and the principal repayment (i.e. the remaining amount of the periodic payment that is used to reduce the outstanding loan amount). At the same time, a loan term may be amortized over a longer period of time than the due date on the loan. In this case, a loan will require a "balloon repayment" (i.e. the amount of principal not yet repaid will be due in full at the end of the term). In either case, all payments on the loan are called repayments.
Why Does Repayment Matter?
For both a borrower and a lender, the breakdown of repayments into principal and interest are very important. For a business, the interest portion of the repayment on a business loan is tax deductible. The principal is not. For a lender, the interest portion of the repayment is treated as income. The principal is not.