Installment note variations
An interest-included installment note with constant periodic payments produces a schedule of payments. The schedule contains diametrically varying amounts of principal and interest from payment to payment. Principal reduction on the mortgage increases and interest paid decreases with each payment made on the mortgage. [See RPI Form 420]
Each payment is applied first to the interest accrued on the remaining principal balance during the period between payments, typically monthly. The remainder of the payment is applied to reduce the principal balance of the debt for accrual of interest during the following period before the next payment is due.
Interest-included installment notes may either:
- be fully amortized through constant periodic payments, meaning the mortgage is fully paid at the end of the term; or
- include a final/balloon payment after a period of installment payments, called a due date.
Interest-extra installment notes call for a constant periodic payment of principal on the debt.
In addition to the payment of principal, accrued interest is paid concurrently with the principal installment.
The principal payments remain constant until the principal amount is fully paid or a due date calls for a final balloon payment. Accordingly, the interest payment decreases with each payment of principal since the interest is paid on the remaining balance. [See RPI Form 422]
Thus, unlike an interest-included note, the amount of each scheduled payment of principal and interest on an interest-extra note is a declining amount from payment to payment.
Installments loans can generally be much lower risk than other alternative loans that do not have installment payments. These loans can include balloon-payment loans or interest-only loans. These types of alternative loans are not structured with a traditional amortization schedule and are issued with a much higher risk than standard installment loans.