What Is Capital Repayment?

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Capital repayment refers to two different types of payment. In business, it is a process by which a payment is made either to reduce the amount of the loan or to reduce the monthly payment of a loan made to serve as capital for a business. Capital payment also refers to paying down the owed capital on a variety of other loans.

Business Capital Repayment

  • When a company needs to reduce expenses and liabilities, it can make a capital repayment in a lump sum to the creditor or shareholders to reduce the amount remaining on a loan. This also can be used to reduce the term of a loan to a shorter period.

Personal Capital Repayment

  • Personal loans, including home loans, always include capital repayment. Typically, the first four to five years of payments cover only interest; the payments that follow begin to reduce the principal amount of the loan, thereby officially becoming capital repayments.

In Terms of Mortgages

  • Capital repayment mortgages are also called annuity mortgages. These loans are set up to pay over a specified period of time, each repayment cutting down the amount of the loan. In contrast, mortgages that cover only interest for the duration of the loan require a capital repayment at the end of the loan to cover the remaining amount.

Share Distribution

  • Capital repayment also can take place by distributing shares or stock of the company back to the investors to reduce capital. Cash repayments may substitute shares in some cases, depending on the company and situation.

Distinction

  • While capital repayment reduces capital, it differs from capital reduction. Capital reduction is a reduction in number of shares in a company that serves a completely different purpose from capital repayment.

References

  • Photo Credit Korovin/iStock/Getty Images
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