Depreciation: definition of loan repayment

Loan repayment is the gradual repayment of a loan or debt through periodic payments. Repayment also refers to the reduction of a loan or debt over time by paying an agreed amount over a specified  period, usually monthly. It can be used for everything from mortgages and car loans to personal debts and credit card debt.

The amount repaid usually goes toward principal and interest, with the majority applied to interest in the early years of the loan. In the later years of the loan, more money is usually used for the principal. This results in shorter payment terms until all that is left is the principal.

What is repayment?

Amortisation is the gradual allocation of the purchase price of an asset over its expected useful life, with the amortisation shifting from the balance sheet to the revenue account. This shows how an intangible asset is used over its useful life. Amortisation is most commonly used to gradually depreciate the value of intangible assets with a finite useful life. Trademarks, copyrights, taxi licenses and patents are a few examples of intangible assets. The idea also applies to deferred fees and discount on receivables.

The repayment concept is also used in lending, where scheduled repayment breaks down the initial loan balance into principal and interest to be paid periodically, as well as the final loan balance. Scheduled repayments indicate that at the beginning of the loan term a more significant portion of the repayments are used to pay the interest. This percentage gradually decreases as the principal of the loan is repaid. This schedule is conducive  to accurately tracking the interest and principal components of the loan payment.

What can repayment be used for?

Repayment has a variety of financial applications, from mortgages and car loans to credit cards. For example, when you take out a mortgage loan, the repayment schedule outlines how much money will go towards paying off the principal and interest each month and how long it will take to pay off the entire loan. It is also useful when budgeting for other types of loans, such as student or personal loans.

In addition to helping individuals keep track of their loan payments, repayment is essential in corporate finance. Companies use it to estimate future cash flows and calculate the present value of the loan.

Repayment can also be used for intangible assets such as patents and copyrights. In this case, the amount repaid is spread over the useful life of the asset. This allows the company to write off a portion of the costs each year for tax purposes.

Repayment can also describe an investment strategy where investors make regular payments to eventually acquire the asset.

Examples of repayment

Housing loan repayment 

A mortgage loan is a basic concept that borrowers need to understand. When you take out a mortgage, your monthly payment includes principal and interest. The amount of principal repaid each month is determined by the loan repayment schedule-a fee schedule that shows how much of each payment goes to principal and how much goes to interest. Over time, the interest due will decrease as more payments are applied to the principal.

Repaying a car loan

When you take out a car loan, you can also use repayment to calculate how much you’ll owe each month. Your monthly payment includes principal and interest. As with a mortgage loan, this payment is divided so that over time the amount of interest paid decreases while the amount applied to the principal increases. Generally speaking, most car loans are paid off in three or five years. The exact terms of your loan will determine how much you owe each month, as well as the total interest you’ll pay. 

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