Debt settlement

The term "debt settlement" refers to the process of settling and reducing debt or credit between a borrower and a lender/creditor.

Debt settlement is typically done by the borrower transferring a monthly or quarterly amount to the lender's account - or by reducing the balance of an overdraft by making a deposit.

Basically, all debt must and should be settled, to the benefit of both lender and borrower. The lender reduces its risk when the debt or credit is reduced, while the borrower becomes debt-free faster the larger the repayments are made.

In practice, however, not all debts are paid off on a regular basis. This applies, for example, to revolving credit or interest-only mortgages, which typically have a grace period of up to 10 years. This results in lower monthly payments for the borrower, but increases the risk for the lender.

Therefore, the lender will often impose stricter requirements for interest-only debt, for example in the form of a higher down payment, better financial circumstances or similar.

Debt settlement reduces lender risk

All credit and debt carries an inherent risk of not being paid back - either in full or in part.

Large credits theoretically carry more risk than small credits, and the same applies to debt in general.

Debt settlement therefore reduces the risk for the lender or creditor. Put simply, each installment on a debt reduces the creditor's risk that all or part of the debt will not be paid.

However, there are several types of debt where interest-only payments are allowed, such as certain bank overdrafts and interest-only mortgages. Interest-only mortgages were introduced in Denmark in 2003 and have been a popular type of loan ever since.

Amortization schedule

An amortization schedule, or amortization table, is a plan for paying off debt.

In the amortization schedule, both lender and borrower can see when an amount is due, how large the amount is, what interest is added and how much the debt is reduced by.

The amortization schedule is often set up as a simple table where each installment is on a new line until the debt is paid in full and the balance reaches 0 at the bottom of the table.

The amortization schedule is often used in banks and mortgage companies and is typically presented in connection with the signing of loan terms and other loan documents.