Chapter 6 Repayment Plans Flashcards
What is the key difference between the repayment of term loans and short term loans?
Term loans are repaid in instalments and are partially liquidating, while short term loans are typically repaid in full at once.
How many types of repayment plans are there for term loans?
There are six types of repayment plans for term loans.
What are the six types of repayment plans for term loans?
- Straight-end repayment plan 2. Partial repayment plan 3. Amortized repayment plan 4. Variable repayment plan 5. Optional repayment plan 6. Reserve repayment plan
What is a Straight-end repayment plan?
A Straight-end repayment plan involves repaying the entire loan amount as a lump sum after the loan period ends, with interest paid annually.
What is the Partial repayment plan or Balloon repayment plan?
Under the Partial repayment plan, smaller repayments are made over the years, with a large final payment at the end of the loan period.
What is an Amortized repayment plan?
An Amortized repayment plan involves repaying the loan in installments over time, extending the partial repayment plan. There are two types: Decreasing and Even.
What is an Amortized decreasing repayment plan?
In the Amortized decreasing plan, the principal remains constant, while the interest decreases over time, causing the annual installment to decrease.
What types of loans use the Amortized decreasing repayment plan?
Loans for machinery and equipment typically use the Amortized decreasing repayment plan.
What is an Amortized even repayment plan?
In the Amortized even plan, the annual installment remains the same, with the principal portion increasing and the interest portion decreasing.
What types of loans use the Amortized even repayment plan?
Loans for farm development, digging wells, construction of godowns, dairy, poultry units, orchards, etc., use the Amortized even repayment plan.
What formula is used to calculate the annual installment in the Amortized even repayment plan?
The formula is: I = B * i / (1 - (1 + i)^-n), where I is the annual installment, B is the principal amount, i is the interest rate, and n is the loan period in years.
What is a Variable repayment plan?
In a Variable repayment plan, the borrower pays varying installment amounts based on financial conditions, such as larger payments in good years and smaller payments in poor years.
Is the Variable repayment plan common in institutional lending?
No, the Variable repayment plan is not commonly found in institutional lending.
What is an Optional repayment plan?
An Optional repayment plan allows the borrower to make additional payments towards the principal amount, in addition to regular interest payments.
What is a Reserve repayment plan or Future repayment plan?
In a Reserve repayment plan, the borrower makes advance payments from savings to avoid difficulties in repaying the loan during poor income years, often seen in farming communities.
