➢The repayment of term loans (i.e., medium-term and long-term loans) differs from short-term loans because their partially liquidating nature characterizes them.
➢These loans are recovered by a given number of installments depending upon the nature of the asset and the amount advanced for the investment under consideration.
➢There are six types of repayment plans for term loans:
1. Straight-end repayment plan or single repayment plan or lump-sum repayment plan
2. Partial repayment plan or Balloon repayment plan
3. Amortized repayment plan:
a. Amortized decreasing repayment plan
b. Amortized even repayment plan or Equated annual installment method
4. Variable repayment plan (or) Quasi-variable repayment plan
5. Optional repayment plan
6. Reserve repayment plan (or) Future repayment plan
1. Straight-end Repayment Plan /Single Repayment Plan / Lump-sum Repayment Plan
➢The entire loan amount is to be cleared off after the expiry of the stipulated period.
➢The principal component is repaid by the borrower in lump-sum when the loan matures, while interest is paid each year.
2. Partial repayment plan or Balloon repayment plan
➢Here the repayment of the loan will be made partially over the years.
➢Under this repayment plan, the installment amount will be decreasing as the years pass by except in the maturity year (final year), during which the investment generates sufficient revenue.
➢This is also called a balloon repayment plan, as the large final payment is made at the end of the loan period (i.e., in the last year) after a series of smaller partial payments.
3. Amortized repayment plan :
➢ Amortization means repayment of the entire loan amount in a series of installments.
➢ This method is an extension of a partial repayment plan.
➢ Amortized repayment plans are of two types:
a. Amortized decreasing repayment plan:
➢ Here the principal component remains constant over the entire repayment period, and the interest amount decreases continuously.
➢ As the principal amount remains fixed and the interest amount decreases, the annual installment amount decreases over the years.
➢ Loans advanced for machinery and equipment will fall under this category.
➢ As the assets do not require many repairs during the initial years of loan repayment, a farmer can repay larger installments.
b. Amortized even repayment plan:
➢Here the annual installment over the entire loan period remains the same.
➢The principal portion of the installment increases continuously, and the interest component declines gradually.
➢This method is adopted for loans granted for farm development, digging of wells, deepening of old wells, construction of godowns, dairy, poultry units, orchards, etc.
➢The formula gives the annual installment
I = B* i/1-(1+i)-n
Where I= Annual installment is Rs.
B= Principal amount borrowed in Rs.
n= Loan period in years i= annual interest rate
4. Variable repayment plan or Quasi-variable repayment plan
➢As the name indicates that, the borrower pays various levels of installments over the loan period.
➢At times of good harvest, a more extensive installment is produced, and at times of poor harvest, the borrower has a smaller installment.
➢According to the convenience of the borrower, the amount of the installment varies.
➢This method is not found in the lendings of institutional financial agencies.
5. Optional repayment plan:
➢Here in this method, an option is given for the borrower to make a payment towards the principal amount and the common interest.
6. Reserve repayment plan or Future repayment plan:
➢This type of repayment is seen with borrowers in areas where there is variability in farm income.
➢In such places, the farmers are haunted by the fear of not paying regular loan installments.
➢To avoid such situations, the farmers make advance payments of loans from the previous year's savings.
➢This type of repayment is advantageous to both the banker and borrower.
➢The bankers need not worry regarding loan recovery even at times of crop failure. On the other hand, the borrower also gains, as he keeps up his integrity and credibility.
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