Debt Repayment Definition

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Debt repayment is simply the process of paying off your principal debt balance on a loan over a period of time. Despite a fairly sensible basic meaning, understanding how to use debt wisely and repay your debt effectively are keys to good money management. This includes an understanding of basic terms surrounding the debt repayment process.

Types of Debt

  • The process of debt repayment varies based on the type of debt you are repaying. For instance, home mortgages often take 15 to 30 years to repay your debt principle. Cars often take from 36 to 72 months. Other personal loans and smaller value types of credits may vary from a few months to several years. It is vital that you understand the terms and conditions of any debt that you use.

Loan Term

  • The timeframe to repay debt is typically called your loan term, or repayment period. This is the normal length of time used to pay off a loan without any extra principal paid on the balance. The longer your loan term, the less you typically pay on monthly installments. MSN Autos points out that car loans of 24 to 48 months are less common now, in favor loans for 60 to 72 months, which make payments more affordable. The drawback is that the longer your debt repayment is spread out, the more you typically pay in interest on the loan.

Interest Rates

  • The interest rate on your loan is usually combined with your loan term to determine how much you have to pay each month in installments. Getting a lower interest rate on a loan, of even a quarter-point, can save you a lot of money on home, auto and other personal loans. To get a good rate, you typically need a good credit score and good timing to get a loan when rates are generally low.

Additional Insights

  • Following some basic advice can help you repay debt more quickly, subsequently saving interest money. Editors of the financial website The Motley Fool share some tips in their "9 Ways to Pay Off Debt." The most basic tip is to pay extra principal when you make monthly payments. This helps you pay down your principal balance more quickly, reducing the amount of interest you pay on future installments. Paying just a little extra on home and auto loans can take months, or years off your repayment. Paying off higher rate loans first, and even transferring balances to lower rate accounts can also save you money and expedite your repayment.

References

  • Photo Credit money makes money image by Andrey Andreev from Fotolia.com
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