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With rolled up interest, interest is compounded, which means it accumulates each month based on the loan balance. At the end of the loan term, the total amount payable includes both the principal and the accumulated interest.
Suppose a borrower takes out a £100,000 loan for a 12-month term with a 1% monthly interest rate.
Since the interest is rolled up, the borrower doesn’t make any monthly payments, and interest accumulates over the loan term.
In this example, the borrower pays £112,000 at the end of the loan term, as they receive the full loan amount upfront but defer all interest payments.
Retained interest allows the lender to retain the full amount of interest upfront from the loan advance. The lender then uses this retained amount to make monthly interest payments on behalf of the borrower throughout the loan term. At the end of the term, the borrower repays only the principal amount, as the interest has been prepaid.
With retained interest, the lender calculates the total interest payable over the loan term at the start. This total amount is deducted from the loan amount, so the borrower receives the loan amount minus retained interest. This method can be advantageous if you want to avoid compounding interest or if the project timeline is relatively short.
Using the same loan terms as before:
Principal: £100,000
Monthly Interest: 1% (or £1,000 per month)
Loan Term: 12 months
The lender calculates the total interest for the 12-month term and retains this amount upfront:
Total Retained Interest: £1,000 * 12 = £12,000
Loan Advance Provided to the Borrower:
Loan Principal (£100,000) – Retained Interest (£12,000) = £88,000
At the end of the term, the borrower repays only the £100,000 principal, as the interest has already been prepaid.
Rolled Up: Interest compounds and accumulates over time, resulting in a higher total repayment. Retained: Interest is calculated at the start and doesn’t accumulate, keeping the repayment predictable.
Rolled Up: The borrower receives the full loan amount upfront, but owes the principal plus interest at the end. Retained: The borrower receives the loan amount minus retained interest, but only repays the principal at the end.
Neither: Neither rolled up nor retained interest requires monthly payments, as both options defer payments until the end.
Both rolled up and retained interest can help you defer payments, but the right choice depends on your project needs and repayment strategy.
Maximising Cash Flow: If you need the full loan amount upfront, rolled up interest allows you to access maximum funds immediately. Longer Project Timelines: Rolled up interest may be ideal if you anticipate needing the loan for a longer term and are comfortable with a compounding interest total.
Simplicity in Repayment: Retained interest allows for a straightforward repayment structure, with only the principal owed at the end of the term.
Short-Term Projects: Retained interest can be cost-effective for shorter loan terms, as interest doesn’t accumulate.
Here’s a side-by-side comparison of rolled up vs. retained interest, using the same loan terms:
Choosing between rolled up and retained interest depends on your financial needs and repayment strategy. Rolled up interest provides access to the full loan amount upfront, while retained interest offers a predictable repayment structure by deducting interest at the start. Both methods can support property investments, auction purchases, or short-term funding, so evaluate your project needs carefully to select the best option.
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