What are the Different Types of Capital Repayment?
A capital repayment is a lump sum payment made to a creditor, investor or shareholder to reduce the overall amount of a loan. This reduction of the principle, also known as capital, can reduce either the length of the loan or the monthly payments. The two main types of capital repayment are business and personal. While a business capital repayment typically applies to companies with shareholders or investors, a personal capital repayment is usually used for large loans, such as a home mortgage.
A business capital repayment is used by companies to reduce their expenses and increase their overall potential income by reducing the amount of interest they must pay to creditors or investors. The most common business capital repayment involves the company making a large, lump sum payment to their creditors. Another form of this capital repayment is a share distribution, in which the company gives shares or stocks back to their creditors or investors to reduce the amount of capital owed.
Both of these options reduce the principle of the loan, thus reducing the amount of interest the company has to pay on the loan in the future. It can also reduce the length of the loan, which allows a company to free up more capital more quickly, allowing for faster expansion of the company if the owners choose. It can also reduce the monthly payments the company must make to its creditors, allowing for an increase in the money available to handle operating costs and smaller expansions for the company.
A personal capital repayment is much like its business counterpart, though on a smaller scale. While the term can technically apply to any loan for which a lump sum payment is made and applied to the principle of the loan rather than to the interest, it is most commonly used for home mortgages. Typical mortgages are set up so only a small amount of each monthly payment is applied to the principle of the loan, while a significantly larger portion is applied to the interest on the loan.
Homeowners who make a lump sum payment in addition to their monthly payments can significantly reduce the capital of their loan and, therefore, the length of the loan in general. A personal capital repayment is also useful when done during a refinance, because it can significantly reduce the amount of monthly payments or officially shorten the loan term. This not only allows homeowners to finish paying off their home much more quickly, but it also saves them a substantial amount in interest.
These lump sum payments can help both private parties and businesses save themselves money in the end and reduce the amount of time they spend paying off a loan. For businesses, this frees up capital to invest into the company. For private parties, it saves homeowners money and can be a fantastic way to plan for old age, ensuring that the home is owned outright before retirement. A capital repayment is a sound financial decision for a person or company to make.
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