lump sum method

A Straight Line Interest Method

Straight line interest method is a method used to amortize or spread out a loan or other debt instrument over several years via fixed periodic payments. This method can also be referred to as an amortizing loan or a rather basic way of paying off bonds. With this method, each payment made is expected to be equal throughout the term of the loan, and the percentage of each payment is split between the principal and interest portion. This method is the most popular amortization method used by banks and other financial institutions.

Straight line interest method is best understood with an example. Assume an individual has taken a loan of $10,000 from a lender which provides a repayment period of 5 years with an interest rate of 8% annually. This means that the borrower has to pay a total of $13,148 in five years i.e. $2,550 annually as the repayment amount. Thus, the first payment of $2,630 in year 1 is comprised of 2 parts – principal of $1,012 and interest of $1,618. In the second year, the payment remains the same, but the percentage of each will slightly change due to increased principal amount and decreased interest amount. In this example, the second payment of $2,630 is of $1,074 in principal and $1,556 in interest. In this way, each payment made will be of equal amount mixed with both the principal and interest. As the loan goes along, the payments made will mostly be consisting of principal and very technical in interest.

The straight line interest method makes it easier for the lender to compound the payments made by the borrowers. This is because this method is responsible for dividing the loan amount into equal amounts of principal and interest payments. Thus, each payment is made on the exact date and eliminates any chances of late or queued payments or any other delays or discrepancies.

The straight line interest method also greatly benefits the borrower. The borrower can plan the repayment schedule in advance and can also take other loan or debt plans simultaneously, if necessary. This method also allows the borrower to pay off the loan much earlier than the stipulated date. This can be done by making extra payments along with the regular payments. Doing so will help in reducing the principal balance earlier and thus, the interest payable and total amount of loan.

Therefore, the straight line interest method serves as a great utility for lenders and borrowers alike and find extensive applications in various financial instruments. It helps in calculating and managing debt repayment easily and efficiently and facilitates a healthy credit record for the borrower.

Once-for-interest repayment method is a kind of loan repayment method, which is specifically used for long-term loan repayment, that is, for the loans with payment period of more than one year or installments in total.

The once-for interest repayment method means that the borrower pays the owed interest regularly each year, while the principal is paid in one lump sum following the expiration of the loan term. Different from the installment repayment method where the borrower would have to pay the interest and part of the principal every year, the once-for-interest repayment method requires the borrower to only pay the interest and postpone the repayment of the principal to the end of the loan term, with the aim of easing the financial pressure of borrowers to some extent.

At the same time, compared with other loan repayment methods, the once-for-interest repayment method could offer borrowers certain advantages, such as proper repayment period and lower interest rate, lower credit threshold and better loan conditions.

On the other hand, in the long run, the once-for-interest repayment method could also bring certain risks to borrowers. The long repayment period means that the borrowed principal has to be repaid long after the loan is gone, and it is also difficult for the borrower to find a new repayment source. Moreover, since the total loan amount is not returned in a short period of time, the once-for-interest repayment could give rise to other repayment problems and a credit crisis.

Therefore, it is suggested that people should be cautious about the once-for-interest repayment, and for those with medium or low income, it is suggested to apply for the installment repayment. The interest rate and repayment terms of the installment repayment method will be better than those of the once-for-interest repayment method, and the principal can be retrieved in a certain period of time, thus avoiding the borrowing of excessive money.