Whether it is a business loan or a personal loan, understanding the capital repayment meaning can allow the borrower to pay back the loan; it is relevant to any borrower or business. Repayment is about paying back money borrowed from a lender. It is usually loaned for a set span of time, during or after which the borrower will make payments against the debt. Part of that money is the principal or the capital, and part of the payment is the interest.
TL;DR (Too Long; Didn't Read)
Capital repayment is paying back the principal of a loan, not the interest. To pay down extra on your loan after the base payment, always make an extra payment against the principal or capital, and this can lower your interest paid over time.
Capital in Loans
You will hear the term capital in two contexts in business. The dictionary defines it as “wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing.” It is also sometimes what is referred to as the principal of a loan: the dollar value of the loan before the interest and insurance are tacked on.
An interest-only (or zero-principal) loan would be when you do not repay any of the loan, and you just pay the interest on the sum. At the end of the loan period, say 25 years later, the capital of the loan would still be owed. On the flip side, with a capital repayment loan, you would be paying back both the interest and the principal of the loan with the result being a loan that is paid in full at the end of that term.
Initially, it may seem strange to pay interest only rather than having a traditional capital repayment plan, but each method has its appeal.
Capital Payment Meaning
Capital payment and capital repayment are essentially the same thing. A small distinction may be that it is a payment plan on a purchase or service as opposed to a loan that requires repayment. Either way, a business or homeowner is paying money against a total for buying something or getting work done or other potential transactions aimed to create capital for the borrower.
The flip side to business’s capital payment is revenue payment, which is money paid for products or services that allow the business to make money. For instance, a bakery is invoiced $5,000 for dairy, grains and everything else needed to crank out delicious products to sell. That is a revenue expense, and paying for it is a revenue payment. Other revenue payment examples include payroll for the employees who make the business successful and car maintenance for, say, a courier company — revenue does not rise without these expenses.
Interest Only vs. Capital Repayment
Paying against a loan for years or even decades only to have the total capital payment still owed after all that time could seem counterintuitive to some people, but it has its place. The interest-only repayment option is sometimes utilized because it is a lower payment that frees up finances for other reasons. People could use it because they are buying a home slightly beyond their means, but a more ideal candidate is someone like a house flipper. He can buy the home, pay only the interest while he renovates it for a year or so and then sell it and pass on the actual debt to the new owner.
Capital repayment is ideal for those wanting to slowly chip away at debt.
If you want to pay off debt quicker, do not just make a larger loan repayment. Instead, make the loan payment as usual but contact the bank and have a teller or service agent help you make a payment against the principal. This way, that extra payment is not going against the interest on the total loan but rather against the borrowed amount itself. Do that often enough, and you will see the total interest owed reduced over time too.
- Korovin/iStock/Getty Images