How do I Choose the Best Loan Repayment Schedule?

A loan repayment schedule is a means of paying back a loan over time through scheduled payments. There is no single best type of loan repayment plan; choosing the right one will depend on the options, the terms of the loan, and the financial situation of the borrower. Understanding some of the common types of loan repayment schedule can help borrowers decide what works best for them.

Interest rates are an important consideration when choosing a loan repayment schedule. Almost all loans charge interest, which may be fixed at one rate, variable, or fixed for a period of time before becoming variable. Generally, the longer the life of the loan, the more the borrower will end up paying in interest. It is therefore usually best for the borrower to choose a repayment plan that will knock out the debt as fast as possible to avoid losing additional money to interest rates.

Some payment plans are determined by the time it will take to pay off the loan. These are often 10, 25, or 30 year repayment systems. For people who are in an excellent place financially, a ten-year loan repayment schedule will eliminate debt the fastest and reduce the amount of time interest has to build up. On larger loans, such as home loans or student loans, extended repayments may be a better option as they reduce the amount of each payment considerably.

In some cases, a lending institution may offer systems such as graduated repayments or income-based repayments. These are generally for borrowers who may not have much money at the time but are expected to see income increase over the years. Graduated repayments start out small and slowly increase over a set period of time. Income-based plans are tied to the amount of income the borrower has, usually through tax return data. If the borrower's income is below the poverty level, the borrower may not have to make payments, but once above that level payments will increase to be a percentage of income.

Consider looking into a loan repayment schedule that offers forgiveness or incentive programs. Loan forgiveness may allow a certain portion of the loan to be discharged after a set amount of time, as long as payments were consistently current or the borrower worked in a certain type of job, such as public service. It is important to remember, however, that under some loan forgiveness programs the amount forgiven is counted as income on the borrower's taxes for the year. Incentives may reduce interest or match interest payments for borrowers who repay consistently.

One other important tip that may be helpful regardless of what loan repayment schedule is chosen is to pay above the minimum when possible. Some financial experts say that increasing payments even by a small amount over the minimum amount can take years off the life of the loan and save hundreds or even thousands in interest. Paying over the minimum is a great way to move quickly forward toward a debt-free name.