What are the similarities and differences between:
a. An equal payment term loan? An equal payment loan is a loan which is repaid in a series of payments of identical amount, each containing the appropriate amount of interest and some repayment of principal.
b. An equal amortization term loan? An equal amortization loan is a loan in which the principal is repaid in equal amounts over the life of the loan and the appropriate amount interest is then added on to each principal repayment.
The two loan forms are similar in that both are repaid in a specified number of payments, evenly spaced over the loan period. They differ in two primary respects:
- While the payments under an equal payment loan are all the same amount, the payments under an equal amortization loan decline over the loan’s life since the declining loan balance leads to lower interest expense.
- On the other hand, while the amount of principal repaid with each payment in an equal amortization loan is constant, the principal repayment in an equal payment loan increases over the loan’s life. Less interest is due with each payment leaving more room for repayment of principal.