When it comes to loan repayment, CoinLoan offers two options — Interest-Only and Principal + Interest formulas. You can select one of them while creating a Loan Offer as a lender or a Loan Request as a borrower on the Lending Market.
What is the difference between Interest-Only and Principal + Interest?
The key difference lies in the payment composition. In essence, the two repayment options distribute loan principal and interests differently throughout the loan term.
In Principal + Interest formula the total amount of principal and interest is divided into equal monthly payments during the loan term. Thus, the composition of interest is decreasing month by month, while the percentage of the loan principal is rising. In practice, it works the following way:
Figure 1. Summary of a Principal+Interest formula loan
In this scenario, the borrower will have a total Payoff Amount of 1,066.20 EUR divided into monthly payments of 88.85 EUR over the year with the interest rate of 66.20 EUR.
The lender benefits Annuity Option for faster return of principal amount, which allows to reinvest these assets into a new loan.
The borrower, for his part, pays a lower amount of interest.
Choosing an Interest-Only formula means that the borrower makes regular payments of interest only, without the principal. Thus, the installments are quite small at first, however, on the final monthly payment, the borrower pays the principal along with the remaining part of interest.
Figure 2. Summary of an Interest-Only formula loan
With these terms on the example, the borrower will pay off the 120 EUR interest by monthly installments of 10 EUR over a year. Thus, the last payment will be for 1,010 EUR to pay off the loan’s principal.
The Interest-Only payment option provides an advantage of high interests for the lender and small payment amounts for the borrower.