To ensure that you will pay off the debt successfully, it is crucial to take into account the repayment plan. As you know the repayment length of a loan depends on its size. The smaller the loan, the smaller the repayment period will be and vice versa.
Whether you are taking out 12 month loans from British Lenders in the UK or long-term loans, you must consider the repayment plan as it can affect the total cost of your loan. First off, you should understand your borrowing cost.
How much you will pay in total depends on how much you want to borrow. If you are borrowing a small amount with a low interest rate, you are likely to pay little money. However, borrowing a large amount of money for an extended period will cost you more. In general, you should consider APR to compare loan offers. The lower the APR, the better it is.
Some reputed direct lenders like British Lenders will offer you 12 month loans at competitive interest rates, but repayment plan does not solely depend on the APR.
Before you take out a loan, you must be familiar with terms like interest rates, timing of payments, the size and the length of the loan. You must understand that how loans are amortised and how to calculate interest, principal and total payments.
Money borrowed for an extended period may have a series of annual, semi-annual, quarterly and monthly instalments.
Direct lenders generally follow these three repayment plans.
| Equal total payments every time, a method based on amortisation concept | The amortisation concept requires each payment toward both the principal and interest. Every month interest will be accrued on unpaid balance. The amount toward principal continues to add up with each monthly repayment. |
| Equal principal payments | Every month you will pay an equal amount of principal. The interest will be calculated on unpaid balance. The interest will decline and so are annual payments because the unpaid balance declines. |
| Equal payments but with a balloon payment due at the end | Under the balloon method, the principal will not be amortised. You will pay it off at the end of the term. |
Direct lenders may use any of these methods depending on your financial circumstances
Long-term loans mainly require repayment plans other than the balloon method. The latter is used to downsize the periodic payment as well as the length of the loan. Different lenders use different methods depending on their policy, your needs, the duration of the loan, and the purpose of borrowing.
Lenders will never impose any repayment plan on you. They let you choose it depending on your financial circumstances. Below are the two tables that demonstrate advantages as well as disadvantages. The equal principal repayment plan incurs less total interest and hence less total monthly payments. This is because the more amount of principal is paid back, but the other hand it will cost you higher payments every month compared to equal total repayment plan.
The amount of interest that you will pay every month varies in both payment plans because it is calculated on unpaid balance. Of course, the unpaid balance will diminish if you pay a large amount of principal each due date.
Method 1 – equal total payment plan
Loan amount – £10,000, Interest rate – 12%, Monthly payments – 12
| Year | Monthly Payments | Principal Payments | Interest | Unpaid Balance |
| 1 | 888.49 | 788.49 | 100 | 9211.51 |
| 2 | 888.49 | 796.37 | 92.12 | 8415.14 |
| 3 | 888.49 | 804.34 | 84.15 | 7610.80 |
| 4 | 888.49 | 812.38 | 76.11 | 6798.42 |
| 5 | 888.49 | 820.51 | 67.98 | 5977.91 |
| 6 | 888.49 | 828.71 | 59.78 | 5149.20 |
| 7 | 888.49 | 837 | 51.49 | 4312.20 |
| 8 | 888.49 | 845.37 | 43.12 | 3466.83 |
| 9 | 888.49 | 853.82 | 34.67 | 2613.11 |
| 10 | 888.49 | 862.36 | 26.13 | 1750.65 |
| 11 | 888.49 | 870.98 | 17.51 | 879.67 |
| 12 | 888.49 | 879.67 | 8.80 | 0 |
| Total | 10661.88 | 10000 | 661.86 | 0 |
Method 2 – equal principal payment plan
Loan amount – £10,000, Interest rate – 12%, Monthly payments – 12
| Year | Monthly Payments | Principal Payments | Interest | Unpaid Balance |
| 1 | 933.33 | 833.33 | 100 | 9166.67 |
| 2 | 925 | 833.33 | 91.67 | 8333.34 |
| 3 | 916.66 | 833.33 | 83.33 | 7500.01 |
| 4 | 908.33 | 833.33 | 75 | 6666.68 |
| 5 | 900 | 833.33 | 66.67 | 5833.35 |
| 6 | 891.66 | 833.33 | 58.33 | 5000.02 |
| 7 | 883.33 | 833.33 | 50 | 4166.69 |
| 8 | 875 | 833.33 | 41.67 | 3333.36 |
| 9 | 866.66 | 833.33 | 33.33 | 2500.03 |
| 10 | 858.33 | 833.33 | 25 | 1666.70 |
| 11 | 850 | 833.33 | 16.67 | 833.7 |
| 12 | 841.70 | 833.33 | 8.33 | 0 |
| Total | 10650 | 10,000 | 650 |
The bottom line
When you take out instalment loans, you should look out for amortisation concept. Whether you choose equal total payment plan or equal principal payment plan, amortisation can prevent you from handling the burden of paying off the principal amount in lump sum. Some direct lenders follow the balloon concept, but try to avoid it. Be careful with prepayment plan as some lenders charge prepayment penalty. Read all terms and conditions of the contract because breach can cost you a lot of money.
