What Is Debt Repayment?

Debt repayment is basically defined as the repayment of any loan, bond or other type of debt obligation. When an individual or business accepts credit or takes out a loan with a bank, they sign a contractual agreement that stipulates the rate, repayment period and other important terms of the debt repayment obligation.

Basic Terms

When considering a loan, the primary debt repayment terms that affect your repayment process are the principal balance, interest rate and length of the repayment period. Many debts are repaid through installments over a stated period of time. Before agreeing to loan terms, you need to understand how your debt repayment works. Bankrate.com author Lucy Lazarony advises consumers to watch out for unethical approaches to setting up loan repayments once common in the auto industry. A main concern is when a lender sets up prepayment penalties or other terms to penalize borrowers that wisely pay down debt early.

Amortized Debt Repayment

Amortized loans are set up with a specific interest and debt repayment term. The debt is paid off in monthly installments with the initial payments applying more toward interest. As you pay down the principal balance over time, the amount of interest you owe decreases and the amount of your payment applied to the principal balance increases. Home mortgages are among the most common examples of consumer amortized loans. Homeowners make monthly payments of principal and interest, and often insurance and taxes, for a stated repayment period.

Revolving Credit Repayment

Credit cards are a common example of a revolving debt product used by consumers. Most card providers off a grace period, often 25 days after purchase, during which complete payoff of your balance means you accrue zero interest. Credit cards do not have specific debt repayment periods as you can make payments while simultaneously making new purchases on the card. Most card providers charge monthly payments of two percent of the balance, with a minimum payment amount of $10, according to the Adventures in Education credit card repayment table.

Debt Repayment Plan

The phrase "debt repayment" is also used relating to debt repayment plans. This is a specific goal and strategy used by someone with significant debt who wants to pay it off as quickly as possible. A general rule of debt is that the longer you have it, the more it costs you. For instance, AIE notes that paying off a $5,000 credit card balance with a 10 percent interest takes 21.8 years if you only make the minimum two percent payments. If you pay 10 percent of your balance monthly, you would pay off the same debt amount in 4.3 years and save significantly on interest charges. Paying extra toward principal each month on a mortgage can save you interest and take years off your mortgage repayment term.