Glossary
Principal and interest
Also called: P&I, amortising loan
A principal-and-interest loan requires regular repayments that cover the interest charged plus part of the amount borrowed, so the balance falls over time and the loan is repaid by the end of the term.
An example
A borrower refinancing a short-term loan into a long-term loan moves onto principal-and-interest repayments. Each monthly payment reduces the balance a little more than the last.
Why it matters
Principal-and-interest repayments are higher than interest-only, but the debt reduces and less interest is paid over the life of the loan. Lenders test whether income can meet these repayments when assessing longer-term loans.
Points to check
Compare the repayments on principal and interest with those on interest only, and check that they fit your income and cash flow. Ask whether you can make extra repayments without fees and whether redraw is available. On income-producing property, lenders may test debt service cover based on principal and interest repayments. A loan that reduces over time builds equity and can make a later refinance easier.
Try it: Repayment calculator