Repayment or amortization refers to the process of repaying debts. There are different ways to settle loan debts.
With annuity repayment, the borrower pays the same instalment throughout the entire term. This is made up of a repayment portion and an interest portion. Since the remaining debt decreases with each repayment, the interest portion decreases after each payment in favour of the repayment portion. This type of repayment is available to all borrowers: both private individuals in the case of personal loans such as car loans or home loans, and self-employed individuals and entrepreneurs in the case of a business loan.
With this type of repayment, the rate decreases after each amortization payment as the remaining debt and the periodic interest decrease. Typically, interest is payable quarterly and amortization annually.
Fixed Loan (Bullet Repayment)
With a fixed-rate loan, also called a bullet loan or bullet repayment, the borrower pays just the interest during the loan term. However, the repayment of the loan amount is fully due at the end of the term. This means that the periodic interest payments remain constant during the term.