VAE 511: Livestock Entrepreneurship (1+0)

METHODS OF REPAYMENT OF LOANS

Four methods are commonly used.

• Straight end repayment or lumpsum repayment
  • The entire loan is paid on the expiry of the term but the interest on the loan is paid each year.
• Partial repayment or variable repayment
  • A part of the loan together with a part of the interest on the loan is paid up every year.
• Amortized even repayment
  • An equal amount is repaid every year.
  • This includes a larger proportion of the principal and a smaller amount of interest in each succeeding installment of payment.
  • The method of payment is suitable when income is likely to flow at a constant rate throughout the period.
  • The annual installment is arrived at through the formula given.

Where,

I = Annual installment in Rs.

B = Principal amount borrowed in Rs.

n = Loan period in year.

i = Annual interest rate in fraction.

• Amortized decreasing repayment
  • The amount of the principal remains constant and the share of interest declines with every installment of repayment.
  • Thus, the annual payment becomes smaller every succeeding year.