Legal Definitions - paydown

A paydown refers to a payment made towards an existing loan that reduces the outstanding principal balance, but does not fully pay off the entire loan. It is a partial reduction of the total amount owed on the loan.

Here are some examples to illustrate this concept:

• Example 1: Mortgage Principal Reduction

  Sarah has a 30-year mortgage on her home. Each month, she makes her regular payment, which covers both interest and a small portion of the principal. However, after receiving a bonus at work, she decides to send an additional $5,000 directly to her lender, specifying that the payment should be applied solely to the principal balance of her mortgage. This additional $5,000 payment is a paydown because it reduces the total amount she owes on her mortgage without completely paying off the entire loan.

• Example 2: Business Line of Credit

  A small manufacturing company, "Innovate Tech," has a $200,000 line of credit with a bank, which they've used to purchase new equipment. After a particularly successful quarter, the company decides to make a $50,000 payment towards the outstanding balance of their line of credit. This $50,000 payment is a paydown, as it reduces the principal amount they owe on the line of credit, making future interest payments lower and freeing up more available credit, but it does not close out the entire loan.

• Example 3: Student Loan Lump Sum

  David has several student loans totaling $40,000. He receives an inheritance of $10,000 and decides to apply it directly to the principal of one of his higher-interest student loans. This $10,000 payment is a paydown because it significantly reduces the principal amount of that specific loan, thereby decreasing the total interest he will pay over time, without fully satisfying his entire student loan debt.