Repayment Plan

A repayment plan is a detailed outline of how to repay a lender for borrowing money through a loan. Generally, most repayment plans require monthly installments for a specific period. The amount of time a borrower receives through a repayment plan varies, depending on the type of loan they get and the lender they work with.

Applying for a loan means entering into a binding financial contract. The contract stipulates the various details of the repayment plan, as well as the terms and conditions of the financial agreement.

What Information Is in a Repayment Plan?

Repayment plans typically include the following information:

The Payment Amount — Your repayment plan must include the total amount you are responsible for repaying, as well as the amount you pay with each installment. If you take out a personal loan with a 12-month repayment schedule, you will know the total cost of the loan plus the installments.
Frequency of Payments — Your repayment plan must include the type of installment plan you have. If you take out an auto loan, you will likely get a monthly payment schedule. But if you take out a mortgage loan, you may choose a biweekly payment schedule.
Due Dates — A repayment plan will list the various payment due dates you need to follow in order to meet the financial obligations of the loan. If you have a monthly payment schedule, then your repayment plan will have multiple monthly payment due dates.
Final Payment Date — In addition to the installment due dates, you will get the final due date of your loan. The final payment date is the last date you have to make a payment.

Short vs. Long Repayment Plans

When you are looking to take out a loan, it’s essential to consider how much time you want to pay off the money you borrow. Installment lenders typically offer flexible payment schedules, so customers can choose how much time they want for repayment. However, specific types of loans may only offer one standard repayment length, such as payday loans.

Short-Term Loan Repayment Plans

A short repayment plan can last anywhere from a few weeks to a couple of months. The minimum repayment length you can get varies depending on the loan type and the lender. For example, one lender may offer a two-week repayment plan, while another requires a two-month commitment.

A short repayment schedule will result in higher monthly payments because the borrower has less time to pay off the outstanding balance. However, borrowers may save more money by choosing a shorter repayment plan because they end up paying fewer monthly interest fees.

Suppose you borrow $1,000 from two different lenders that offer a 20% interest rate. A 6-month repayment plan will cost $59.14 in interest payments, while a 12-month repayment plan will cost $111.61. By opting for a shorter repayment term, you could save $52.47.

If you are considering signing up for a short repayment schedule, consider whether you can afford the higher monthly payments before signing a loan agreement.

Long-Term Loan Repayment Plans

An extended repayment length can last a few months or several years, depending on the type of loan you get. A personal lender may only offer an extended repayment plan that lasts 12 months. Still, you could get a 30-year repayment plan with a mortgage lender.

Long repayment plans are ideal for borrowers that need to borrow larger lump sums. The monthly payments are generally lower than short-term loans, making long repayment plans more affordable. The downside is that you will end up paying more money in the long run for borrowing money. The more time you spend paying off the outstanding debt, the more interest payments you must make.

Keep in mind that financial institutions make money by charging interest. If a borrower pays back the installment loan a few months early, the lender loses out on that additional income. To prevent early payments, some lenders charge prepayment penalties. But if your lender does not issue penalty fees for early repayment, you can save money by paying off your long-term loan early.

Repayment Plans for Different Loan Options

The repayment plan you can get depends on the type of loan you apply for. Read about a few different loan options below to find your preferred repayment plan.

Federal Student Loans

Federal student loans are student loans provided by the federal government. The U.S. Department of Education provides federal loans based on a student’s financial need, status, citizenship, and other factors.

Federal student loan borrowers can make payments while enrolled in school or defer payments until graduation. The standard repayment plan for federal student loans is typically paid off over 10 years through fixed monthly payments. But borrowers can switch to a different repayment plan that works better for them.

One of the perks of using federal loans is that borrowers can apply for income-driven repayment plans. If your financial circumstances change and you can no longer afford to pay your current monthly amount, you can apply to switch to an income-driven repayment plan.

These are the income-driven repayment plans offered to low-income borrowers:

Revised Pay As You Earn Repayment Plan (REPAYE)

The Revised Pay As You Earn Repayment Plan (REPAYE) is available to borrowers that have Direct Loans. The monthly payments are typically 10% of a person’s discretionary income. Eligibility for this repayment plan depends on the borrower’s updated income and family size. If the borrower is married, then both spouses’ incomes are taken into consideration.

Pay As You Earn Repayment Plan (PAYE)

Under the Pay As You Earn Repayment Plan (PAYE), borrowers can pay 10% of their discretionary income. This plan can help students save more money than the 10-year Standard Repayment Plan. In order to be eligible for the PAYE plan, you must be a new borrower on or after Oct. 1, 2007. You may also be eligible if you received a disbursement of a Direct Loan on or after Oct. 1, 2011.

Income-Based Repayment Plan (IBR)

If your student loan debt far exceeds your income, you may qualify for the Income-Based Repayment Plan (IBR). The IBR plan helps borrowers pay as little as 10% or 15% of their discretionary income. The payment amount changes annually based on your income and family size. If you are married, know that your spouse’s income is only taken into consideration if you file a joint tax return.

Income-Contingent Repayment Plan (ICR)

Any borrower with an eligible Direct Loan may qualify for an Income-Contingent Repayment Plan (ICR). The monthly payment amount is the lesser option between the two potential plans.

The monthly payment amount is one of the following:

20% of the borrower’s discretionary income.
The amount the borrower would pay with a fixed payment over 12 years.

Even if you qualify for the ICR plan, payments are recalculated annually. The amount you pay depends on various factors, such as your updated income, family size, and the total amount of your Direct Loans.

Income-Sensitive Repayment Plan

The Income-Sensitive Repayment Plan is only available for Federal Family Education Loan (FFEL) Program loans. The FFEL Program worked with private lenders to provide education loans guaranteed by the federal government. Although the FFEL Program ended in 2010, all new loans are now made through the William D. Ford Federal Direct Loan Program.

The repayment period varies, but the outstanding loan balance will be fully repaid within 15 years. Student loan payments under the Income-Sensitive Repayment Plan are based on the borrower’s annual income.

Private Student Loans

Private student loans are student loans offered by private financial institutions, such as banks, credit unions, and online lenders. In addition, consumers can get private student loans from state-based or state-affiliated organizations.

The private student loan repayment plan varies depending on the private lender and the borrower’s financial background. However, borrowers can typically choose to reduce or postpone monthly payments until after graduation. Deferred payments typically do not accrue interest fees, although this depends on the individual financial institution.

Individuals with higher credit scores typically get lower interest rates from private lenders which make the repayment process more affordable. In contrast, students with lower credit scores typically get higher monthly payments due to higher rates. Although, keep in mind that private student loans generally have higher interest rates than federal student loans.

The downside of private student loans is that, unlike federal student loans, they do not offer multiple repayment plans. The repayment plan a borrower gets is usually based on their income, monthly expenses, and existing debt. If the borrower cannot meet the financial obligations of their repayment plan, they must talk to their lender or refinance the private student loan.

Personal Loans

A personal loan is an installment loan that a borrower acquires from a financial institution for personal expenses. Borrowers receive a lump sum based on their income, creditworthiness, and other factors. Banks, credit unions, and online lenders offer personal loans.

The money a borrower receives is repaid through monthly payments for a specified number of months. The length of the repayment period varies by lender but is generally very flexible. You can usually choose between a short or extended repayment schedule.

Generally, an applicant will have to submit the following documents to get a personal loan:

A government-issued photo ID (driver’s license or state ID).
A Social Security Number (some lenders may accept ITIN).
Proof of address (utility bills, credit card statements, etc.).
Proof of income (paycheck stubs, bank statements, etc.).

If you apply for an online personal loan, you may not have to submit any documentation. Many consumers in need of fast emergency funding often turn to online lenders because the process is streamlined and far more convenient. All you have to do is answer some basic personal questions online and complete a bank verification process. It may be possible to get an instant approval for online personal loans within minutes of submitting your information with some lenders.

There are two types of personal loans available to consumers: unsecured and secured. Most personal loans are unsecured, which means the borrower does not have to provide collateral. Collateral is a valuable asset, such as cash in a savings account or a car title. But suppose a consumer has difficulty qualifying for a loan due to low credit. In that case, they may apply for a secured personal loan.

Secured personal loans tend to have higher approval rates because the risk of default is lower for lenders. However, if the borrower experiences financial issues and cannot repay their outstanding balance, they can lose possession of their collateral. For this reason, many financial experts typically advise consumers to avoid secured loans.

Financial institutions that provide personal loans typically offer fixed interest rates, although variable rates may be an option. Fixed-rate loans provide borrowers with a consistent payment schedule that does not change month to month. Predictable monthly payments give stability to borrowers so they can stick to a budget plan. But if you have financial flexibility, you may opt for a variable-rate loan instead.

Mortgage Loans

A mortgage loan, or home loan, is a loan meant to purchase a real estate property. To be eligible for a mortgage loan, the applicant must have a qualifying credit score and sufficient income. In addition, the lender will consider the property type, assets, debt-to-income ratio, and more.

Mortgage loans are secured loans because the property is used as collateral. Suppose the borrower cannot meet the repayment terms of the contract. In that case, the lender has the legal right to repossess the property. Although financial experts usually advise consumers against using collateral to get funding, there are exceptions.

Mortgage loans are sometimes referred to as “good debt.” Good debt is any debt that increases in value or increases the borrower’s wealth. A home is a valuable asset, and the borrower may use it to build equity or sell for a profit. Equity is the amount of the home that a borrower owns in relation to the balance of the loan. Equity allows homeowners to borrow money to reinvest in the home or use it for emergency expenses.

These are some of the most common mortgage loan options:

Conventional Loans — A conventional mortgage is a mortgage loan that is not backed by a government agency. Generally, interested borrowers must have a decent credit score and a debt-to-income ratio lower than 45%. Most conventional loans have a 15, 20, or 30-year repayment plan.
Fixed-Rate Mortgages — A fixed-rate mortgage loan has an interest rate that stays the same throughout the repayment period. However, the monthly payment amount may still change due to property tax and insurance rate fluctuations. Fixed-rate repayment plans are ideal for people that want to budget their money and plan long-term financial goals. Fixed-rate mortgages typically have a 15 or 30-year repayment length.
Adjustable-Rate Mortgages — An adjustable-rate mortgage is a 30-year home loan with a variable rate. Variable rates depend on market rates, so they can increase or decrease unexpectedly. However, borrowers must agree to an introductory fixed rate for a brief period. Typically the introductory period lasts 5, 7, or 10 years.
FHA Loans — A Federal Housing Administration (FHA) loan is a mortgage provided by a private lender and backed by the Federal Housing Administration. FHA loans are fixed-rate loans with a 15 or 30-year repayment plan. The loan amount varies, but most lenders only provide up to $417,000.
VA Loans — The U.S. Department of Veterans Affairs program offers mortgages called VA loans. VA loans are issued through private lenders, although they are backed by the federal government. Active and veteran service personnel may apply for VA loans. The repayment plan for a VA loan varies by lender.
USDA Loans — A USDA loan is a mortgage made or guaranteed by the United States Department of Agriculture. USDA is designed for individuals and families in rural areas. A down payment is unnecessary because the government finances the entire home price cost. To qualify, applicants cannot have debt that exceeds their income by 41% and purchase mortgage insurance.

Cash Advance Loans

A cash advance loan, also known as a payday loan, is a short-term loan that typically provides small lump sums. Cash advance payday loans are popular because most lenders provide funding within one business day. You could use the loan money for almost any purchase, although you may only get a few hundred dollars.

Unlike other loan options, a borrower’s credit score is not essential during the qualification process. If you have a reliable source of income and the ability to adhere to a repayment plan, you could qualify for a payday loan.

Payday loans generally have a two-week repayment period. As the name suggests, they are for financial emergencies in between pay periods. The money you borrow is typically withdrawn automatically on your next pay period. If the loan cannot be paid back within such a short period, then the loan may renew automatically.

Unfortunately, many borrowers end up struggling to repay their payday loans due to short repayment plans and high-interest rates. Many financial experts advise consumers against applying for payday loans due to these risks. If you are interested in working with a payday lender, carefully review the proposed repayment plan before signing a loan agreement.

Auto Loans

An auto loan, or car loan, is a loan meant for the purchase of a new or used vehicle. Auto loans are secured using the car, so they are a form of good debt. Borrowers can build equity in their assets by making continuous monthly payments. However, if a borrower defaults on the auto loan, they risk losing possession of the vehicle.

Most auto loan repayment plans are in 12-month increments with 24, 36, 48, 60, 72, and 84-month plans. However, it is possible to get an auto loan that has a shorter or longer repayment plan. Keep in mind that a longer repayment length will increase the overall cost of the auto loan.

During the approval process for an auto loan, the lender will consider the borrower’s income, creditworthiness, DTI ratio, and other factors. While it’s possible for low-credit borrowers to qualify, they may have to compare multiple lenders to find the offer with the lowest interest rate.

Pawn Shop Loan

A pawn shop loan is a secured loan from a pawnbroker. Pawnbrokers offer emergency loans to people that provide valuable assets as collateral. The amount a person may acquire with a pawn shop loan depends entirely on the worth of the asset. For example, someone that pawns a watch will get far less money than someone that pawns a car title.

Pawn shop loans typically last one month, although getting an extended repayment plan may be possible. It’s important for borrowers to follow their repayment plan carefully. Otherwise, they risk losing their personal property. However, many people struggle to keep up with their repayment schedule due to extremely high-interest rates. It may be a good idea to shop around and compare rates before using collateral to get a pawn shop loan.

How To Speed up a Repayment Plan

A repayment plan allows borrowers to pay off loans over time. Repayment plans can be short or long, allowing people to choose the repayment schedule that works with their finances. However, a longer repayment plan will increase the overall cost of the loan. The good news is that many lenders allow borrowers to repay their loans sooner to save money!

But before you start speeding up your repayment plan, it is important to first ensure that your lender does not charge prepayment penalties. A prepayment penalty is a significant fee for altering the repayment schedule or making early payments.

Learn how to reduce the cost of borrowing money below:

Make Biweekly Payments

Most repayment plans require monthly payments. However, you can pay more often in order to speed up your repayment plan! Paying more than once a month ensures your money goes toward repaying the principal balance rather than interest fees. An easy way to actively reduce the remaining loan balance is to make biweekly payments. If you cannot afford to double your monthly payment, you can make the minimum payment and then make a second, smaller payment on your next pay period.

Round up Your Monthly Payments

Suppose you do not want to make more than one loan payment a month, but you still want to shorten your repayment plan. In that case, you can round up your monthly payments! Rounding up your payment amount helps you chip away at the principal balance and still keep money in your pocket. Suppose your monthly payment amount is $178. If you start paying $200, you can pay an extra $264 per year and shorten your repayment length!

Consolidate Your Debt

Having too many monthly bills can make it harder to focus on repaying one specific loan. One way to organize your finances and save money is to consolidate your debt. Consolidation is the process of merging multiple debts using a substantial loan. Debt consolidation means you only have to worry about one monthly payment and one interest rate. It may be possible to save money if you acquire a new loan with a lower rate and fewer fees. Many borrowers use personal loans to consolidate their debt due to flexible repayment plans and decent interest rates.

Increase Your Income

Increasing the amount you make every month can help you shorten the repayment period of your loan because you will have more money to give to the lender! There are numerous side hustle options to increase your finances. The best one for you depends on your desired schedule and style of work.

These are a few ways you can make extra money to repay loans:

Write articles or sell art as a freelancer.
Walk dogs in your neighborhood.
Deliver groceries or takeout orders.
Sign up to add advertisements to your vehicle.
Become a rideshare driver.

What if I’m Struggling To Keep Up With My Current Repayment Plan?

Financial circumstances can change unexpectedly, which can result in issues. It can be stressful when a borrower can no longer keep up with their monthly payments. But the good news is that there are options!

If your income is not high enough to afford your loan payments, reach out to your lender to discuss your options. If the situation is temporary, your lender may be able to extend the due date. If your financial situation is uncertain, you can discuss getting a new repayment plan. If your lender cannot, or will not, adjust your current repayment plan, you can look into refinancing.

Refinancing is the process of paying off an existing loan with a new one. To refinance, a borrower must apply with a new lender to get a new financial contract. Refinancing is beneficial because it may help a borrower get lower interest rates and monthly payments. Keep in mind that refinancing is essentially applying for a new loan, so you will have to undergo an approval process and a credit check.

You will have to provide the same information you did when you initially applied for your existing loan. Be ready to provide your name, address, date of birth, SSN, etc. However, you will also have to provide the new lender with the contact information of your existing lender.

If you qualify for a refinanced loan, your lender may take care of repaying the remaining loan balance. If you obtain more money than you owe, the new lender will give you the excess money.

But if the new lender does not handle the paperwork, then you are responsible for using the money from the new refinanced loan to pay off the old lender.

The Bottom Line: Repayment Plans

A repayment plan is an agreement made between a borrower and the lender. The repayment plan stipulates how the loan is to be repaid and how much the total loan costs. Depending on the type of loan you get, you may be able to choose between multiple repayment plans. Remember that it may be possible to replace a repayment plan if you find yourself struggling to make monthly payments. But ensure you speak with your lender immediately if you experience any financial issues to avoid damage to your credit score and penalty fees.

References:
Federal Student Loan Repayment Plans│Federal Student Aid Federal Family Education Loan (FFEL) program│Federal Student Aid
6 Different Types of Home Loans│Realtor