After taking the loans, the need to repay the entire loan amount along with the applicable interest. The repayment arrangement can be agreed between the bank and the borrower depending on the need and feasibility of the borrower. There are different types of loan repayment arrangements are used which are specified below.
Equal Periodic Installments: This is the most widely used repayment option used by the borrowers to repay the loan amount along with interest. In this type of repayment arrangement, the borrower repays an equal amount at periodic intervals (monthly, quarterly or annually depending on the agreement) to the bank. This payment from the borrower includes the interest for the period and some part of the principal payment. With every payment the outstanding principal decreases.
Stepped Up Installments: In this type of repayment arrangement; the installments payable on the loan are increased after certain intervals over the entire tenure of the loan. The installments start with a small amount and then start increasing with either constant amount or constant percentage. This type of repayment arrangement is preferred by borrowers who expect increase in their income after certain intervals (yearly salary increase for salaried professionals).
Bullet Repayment: In this type of repayment arrangement, most of the repayment is made on the maturity of the loan. The interest can be paid during the tenure of the loan or at the time of maturity.
Deferred Repayment: In this type of repayment arrangement, the repayment starts only after a given period of time after disbursement. Here the starting date is deferred by the repayment schedule can follow the equal period installment or the steeped up installment methods. This is mostly used for education loans or some project finance where the repayment starts only after completion of the education course or the project.