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Oooperof/Ve Hxtension LONGTERM LOAN REPAYMENT METHODS KM James D. Libbin, Extension Farm Management Specialist Guide Z702 FRBAAH 7525 When money is borrowed for longterm capital investments, it is usually repaid in a series of annual, semiannual or monthly payments. There are several different ways the amount of these payments can be calculated. For example, loans may be repaid in a series of: 1. Equal total payments per time period (called amortization) 2. Equal principal payments per time period or 3. Equal payments over a specified time period with a balloon payment due at the end to repay the remaining balance When the equal total payment method of amortizing a loan is used, each payment includes the accrued interest on the unpaid balance, plus some principal. The amount of interest paid will decrease and the amount of the annual payment applied toward the principal will increase with each payment. The example in table 1 illustrates how the amounts of interest and principal in an equal total payment change over the loan period. The equal principal payment plan also provides for payment of accrued interest on the unpaid balance, plus an equal amount of the principal. The total payment will decline through time because, as the remaining principal balance declines, the amount of interest accrued declines. The example in table 2 illustrates interest and principal payments over the loan period. These two payment plans are the most common methods financial institutions use to compute loan payments on longterm investments. Individual lenders will use both of these, but may also use a balloon system. The balloon payment method is often used to reduce the size of periodic payments, but also to shorten the total time period in which the loan is fully repaid. To accomplish this, a portion of the principal will not be amortized (paid off in a series of payments) but will be due in a lump sum at the end of the loan period. For many bor rowers, this means the amount to be repaid in the lump sum must be refinanced, which may be difficult. BORROWER USE OF LOAN REPAYMENT PRINCIPLES To calculate the amount of the loan payments, all terms of the loan must first be agreed upon. These include the interest rate, the timing of payments (e.g. monthly, quarterly, annually), the length of theloan (time period over which the loan is to be repaid) and the original amount of the loan. The process of calculating the amount of the payments is fairly simple. Commercial lenders can rapidly compute the loan repayment schedule and process the loan contract for the borrower. They will also periodically advise the borrower of the current status of the loan. It is also necessary for the borrower to understand how loans are amortized, how to calculate loan payment amounts and remaining principal balances as of a particular date, and how to calculate principal and interest portions of the next payment. This information is valuable for planning purposes before an investment is actually made, for tax management and planning purposes before the loan statement is received, and for preparation of financial statements. Because many farmers and ranchers now have electronic calculators or microcomputers, the calculations can be carried out relatively easily and quickly. The use of printed tables is still fairly common, but these are less flexible because of the limited number of interest rates and time periods for which the tables have been calculated. Regardless of whether the tables or a calculator is used, working through an example helps apply the concepts and formulas to a specific case.
Object Description
Title  Longterm loan repayment methods 
Series Designation  Guide Z702; FRBMH 7525 
Description  Guide containing information to help consumers understand different longterm repayment plan options. 
Subject  Loans; Payment; loans (NAL); investment planning (NAL); 
Creator  Libbin, James D. 
Date Original  198410 
Digital Publisher  New Mexico State University Library; 
Rights  Copyright, NMSU Board of Regents. 
Collection  NMSU Cooperative Extension Service and Agricultural Experiment Station Publications 
Source  Monograph; [4] p.; J87.N6 X313.61, F19/3, no. Z702 
Type  Text 
Format  image/tiff 
Language  eng 
Page Description
Title  Page 1 
Series Designation  Guide Z702; FRBMH 7525 
Subject  Loans; Payment; loans (NAL); investment planning (NAL); 
Creator  Libbin, James D. 
Date Original  198410 
Digital Publisher  New Mexico State University Library; 
Rights  Copyright, NMSU Board of Regents. 
Collection  NMSU Cooperative Extension Service and Agricultural Experiment Station Publications 
Digital Identifier  UAAPg00Z7020001 
Is Part Of  Longterm loan repayment methods 
Type  Text 
Format  image/tiff 
Language  eng 
OCR  Oooperof/Ve Hxtension LONGTERM LOAN REPAYMENT METHODS KM James D. Libbin, Extension Farm Management Specialist Guide Z702 FRBAAH 7525 When money is borrowed for longterm capital investments, it is usually repaid in a series of annual, semiannual or monthly payments. There are several different ways the amount of these payments can be calculated. For example, loans may be repaid in a series of: 1. Equal total payments per time period (called amortization) 2. Equal principal payments per time period or 3. Equal payments over a specified time period with a balloon payment due at the end to repay the remaining balance When the equal total payment method of amortizing a loan is used, each payment includes the accrued interest on the unpaid balance, plus some principal. The amount of interest paid will decrease and the amount of the annual payment applied toward the principal will increase with each payment. The example in table 1 illustrates how the amounts of interest and principal in an equal total payment change over the loan period. The equal principal payment plan also provides for payment of accrued interest on the unpaid balance, plus an equal amount of the principal. The total payment will decline through time because, as the remaining principal balance declines, the amount of interest accrued declines. The example in table 2 illustrates interest and principal payments over the loan period. These two payment plans are the most common methods financial institutions use to compute loan payments on longterm investments. Individual lenders will use both of these, but may also use a balloon system. The balloon payment method is often used to reduce the size of periodic payments, but also to shorten the total time period in which the loan is fully repaid. To accomplish this, a portion of the principal will not be amortized (paid off in a series of payments) but will be due in a lump sum at the end of the loan period. For many bor rowers, this means the amount to be repaid in the lump sum must be refinanced, which may be difficult. BORROWER USE OF LOAN REPAYMENT PRINCIPLES To calculate the amount of the loan payments, all terms of the loan must first be agreed upon. These include the interest rate, the timing of payments (e.g. monthly, quarterly, annually), the length of theloan (time period over which the loan is to be repaid) and the original amount of the loan. The process of calculating the amount of the payments is fairly simple. Commercial lenders can rapidly compute the loan repayment schedule and process the loan contract for the borrower. They will also periodically advise the borrower of the current status of the loan. It is also necessary for the borrower to understand how loans are amortized, how to calculate loan payment amounts and remaining principal balances as of a particular date, and how to calculate principal and interest portions of the next payment. This information is valuable for planning purposes before an investment is actually made, for tax management and planning purposes before the loan statement is received, and for preparation of financial statements. Because many farmers and ranchers now have electronic calculators or microcomputers, the calculations can be carried out relatively easily and quickly. The use of printed tables is still fairly common, but these are less flexible because of the limited number of interest rates and time periods for which the tables have been calculated. Regardless of whether the tables or a calculator is used, working through an example helps apply the concepts and formulas to a specific case. 