Debt repayment refers to the process of returning money that has been borrowed, along with any interest and fees that have accrued. It involves repaying the principal amount and any applicable interest as per the terms agreed upon with the lender.
Repaying a loan means returning the borrowed funds within the agreed timeframe. Loan repayment includes repaying both the principal amount and any interest that accrues over time. Timely and consistent repayment is crucial for maintaining a positive credit profile, as it reflects well on the borrower’s creditworthiness. Failure to repay a loan on time may result in penalties and negatively affect the individual’s credit score.
The terms of debt repayment are established when the loan is taken out and include the loan amount, the interest rate, and the repayment schedule. Read: UNDERSTANDING DEBT: TYPES, ADVANTAGES, AND DISADVANTAGES
Key Concepts in Debt Repayment
- Principal Amount: The initial sum of money borrowed from a lender.
- Interest Rate: This is the percentage charged by the lender on the principal amount for borrowing money. It can be either fixed or variable, depending on the loan agreement. The asset borrowed may be in the form of cash, a large asset (such as a vehicle or property), or consumer goods.
- Installments: The total number of payments required to repay a debt or purchase. For instance, if you buy a phone with six installments, you will make six separate payments over a specified period.
Repayment terms are outlined in the loan agreement and may include repayment of both principal and interest through equated monthly installments (EMIs) or through a lump sum payment (bullet payment).
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