Glossary
Principal and interest (P&I)
Repayments that cover both the interest charged and a slice of the debt itself, so the balance actually falls.
In plain English
A principal and interest repayment does two jobs at once: it pays the interest that accrued, and it reduces what you owe. It is the default shape for a term loan, and it is the only shape where the debt goes away without a separate event.
The alternative is interest only, where the balance is unchanged at the end of the period, and the two are often blended: interest only for a year or two while a business beds in, then principal and interest for the rest of the term. The blended version raises the later repayment, because the same principal now has fewer years to clear in.
Why a lender cares
Cover ratios are usually tested against the principal and interest repayment even where the facility starts interest only, because that is the payment the business has to survive once the honeymoon ends. A business that services comfortably on the interest-only payment and fails on the P&I one has not been approved, it has been approved for now.
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