What does bank do with “Repaid Principal”?
Does it add to their lending reserves or is it utilized in other ways? It depends on how the economy and the bank in particular are doing. To simplify things greatly, banks get deposits and lend (or otherwise invest) the majority of those deposits. They must keep some percentage in reserve in case depositors want to make withdrawals, and if they get a high percentage of withdrawals (pushing them to be undercapitalized) then they may sell their loans to other banks. Whether they lend the money to someone else or use the money for something else will depend completely on how many reserves they have from depositors and whether they have people lined up to take profitable loans from them. I wrote this answer for the benefit of CQM, I'd vote to close this question if I had 49 more reputation points, since it's not really about personal finance.
"So with any debt, be it a loan or a bond or anything else, you have two parts, the principal and the interest. The interest payment is calculated by applying the interest % to the principal. Most bonds are ""bullet bonds"" which means that the principle remains completely outstanding for the life of the bond and thus your interest payments are constant throughout the life of the bond (usually paid semi-annually). Typically part of the purpose of these is to be indefinitely refinanced, so you never really pay the principal back, though it is theoretically due at expiration.  What you are thinking of when you say a loan from a bank is an amortizing loan. With these you pay an increasing amount of the principal each period calculated such that your payments are all exactly the same (including the final payment).  Bonds, just like bank loans, can be bullet, partially amortizing (you pay some of the principle but still have a smaller lump sum at the end) and fully amortizing. One really common bullet structure is ""5 non-call 3,"" which means you aren't allowed to pay the principle down for the first three years even if you want to! This is to protect investors who spend time and resources investing in you!" This depends on the practise and applications available with the Beneficiary Bank. For a corporate customer, the details are show. For Retail customers they are generally not shown. The money is paid to investors who bought those mortgage backed securities. The company that services those loans is responsible for making sure the money is paid to the right investors When banks create a loan, it is said they write the debit account out of thin air (liability), balanced by the loan (asset).  When the person who gets the loans spends the money, the bank has to pay it.  If the bank only has 10% reserves of the money it loans, how does the bank pay out it's loans?  Does it borrow the money from the Fed and then pay it back? "You should be able to pay back whenever; what's the point of an arbitrary timeline? Cash flow is the life blood of any business.  When banks loan money, they are expecting a steady cash flow back. If you just pay back ""whenever"" - the bank has no idea what they'll be getting back month-to-month.  When they can set the terms of the loan (length, rate, payment amount), they know how much cash flow they expect to get.  What does [the term of the loan] even mean and what difference in the world does it make? In addition to the predictable cash flow needs above, setting a term for the loan determines how long their money will be tied up in the loan. The longer a bank has money tied up in a loan, the more risk there is that the borrower will default, so the bank will require a greater return (interest rate) for that extra risk. What you have described is effectively a revolving line of credit.  The bank let you borrow money arbitrarily, charges you a certain rate of interest, and you can pay them back at your schedule.  If you pay all of the interest for that month, everything else goes to principal. If you don't pay all of the interest, that interest is added to the balance and gets interest compounded on top of it.  Both are perfectly viable business models, and bank employ them both, but they meed different needs for the bank.  Fixed-term loans help stabilize cash flow, and lines of credit provide convenience for customers." Simply put, for a mortgage, interest is charged only on the balance as well. Think of it this way - on a $100K 6% loan, on day one, 1/2% is $500, and the payment is just under $600, so barely $100 goes to principal. But the last payment of $600 is nearly all principal.  By the way, you are welcome to make extra principal payments along with the payment due each month. An extra $244 in this example, paid each and every month, will drop the term to just 15 years. Think about that, 40% higher payment, all attacking the principal, and you cut the term by 1/2 the time. "There are two ways that mortgages are sold: The loan is collateralized and sold to investors. This allows the bank to free up money for more loans. Of course sometime the loan may be treated like in the game of hot potato nobody want s to be holding a shaky loan when it goes into default. The second way that a loan is sold is through the servicing of the loan. This is the company or bank that collects your monthly payments, and handles the disbursement of escrow funds. Some banks lenders never sell servicing, others never do the servicing themselves. Once the servicing is sold the first time there is no telling how many times it will be sold.  The servicing of the loan is separate from the collateralization of the loan. When you applied for the loan you should have been given a Servicing Disclosure Statement Servicing Disclosure Statement. RESPA requires the lender or mortgage   broker to tell you in writing, when you apply for a loan or within the   next three business days, whether it expects that someone else will be   servicing your loan (collecting your payments). The language is set by the US government: [We may assign, sell, or transfer the servicing of your loan while the   loan is outstanding.] [or] [We do not service mortgage loans of the   type for which you applied. We intend to assign, sell, or transfer the   servicing of your mortgage loan before the first payment is due.] [or]   [The loan for which you have applied will be serviced at this   financial institution and we do not intend to sell, transfer, or   assign the servicing of the loan.] [INSTRUCTIONS TO PREPARER: Insert   the date and select the appropriate language under ""Servicing Transfer   Information."" The model format may be annotated with further   information that clarifies or enhances the model language.]" With the following variables the periodic (annual) repayment is given by The recurrence equation for the balance b at the end of month x is derived from b[x + 1] = b[x] (1 + r) - d where b[0] = s giving The interest portion of the final payment is b[n - 1] r and the total principal repaid at the end of period n - 1 is s - b[n - 1] Solving simultaneously n = 8.9998 and s = 7240 The principal repaid at the end of the first period is s - b[1] or d - r s = 479.74 This is adequately covered by the differential between lending and receiving interest rates.  ...and technically, they pay the central bank an interest rate on the money lent as well, which means that they *are* paying back equity holders (all be it very slowly and very slightly).  The equity holders have the ability to will money into existence, so there's no artificial limitation they face with respect to the branch banking system. They offer a coupon that is 40% to 60% the actual amount that it could in theory offer, if not for delinquent cases.... the banks pocket the difference in the name to be able to pay up consistently..... not a pretty picture but it covers their ass The second choice is a normal payment, just made early. This guards you against forgetting to make the payment later and incurring late payment fees -- which in this kind of loan are added to the balance and themselves accrue compounded interest. The first option is an extra payment, applied entirely to the principal. That lets you avoid years of accrued interest on that portion of the loan, and reduces the loan's actual cost. I think the extra payment is a better investment. your money in a bank gets used to fund other investments. So basically you either make money, or you're making money for someone else.  Sorry i'm such a dick for not foreseeing 100,000% APR interest in bank accounts with no inflation, god i feel stupid now. "The Wikipedia page for Repurchase Agreement has two relevant pointers on this topic:  The legal title for any securities used in a repo actually pass from seller to buyer during the term of the agreement. In basic terms this means that if one sells a bond on repo with a promise to buy it back, then the ownership actually transfers to the buyer for that period of time.  If a coupon is paid during this time period, it can either go to the buyer or the seller. Usually, the coupon payment goes to the initial owner of the security pre-repo (our ""seller""). But sometimes the repurchase agreement will specify otherwise. So, again in basic terms, usually the repo seller/initial security owner receives any payments made during the term of the repurchase agreement. (Both points are in the first paragraph of the section ""Structure and Terminology"".)" So if it's a bridge loan they need a lot of money now to keep the trains running but expect to get the actual loan they need in the future at which point they pay off the bridge loan ideally after not having to make too many coupon payments. That's what it sounds like to me.  Scenario: I am building a large development, my main funding source is kaput for whatever reason, I need money now to make payroll, buy fuel, pay for that shipment of supplies etc, I don't have time to secure the huge loan I need in the future for the rest of the project so I get a loan to cover me until I secure that deal and put my building site as collateral against it, I get the full funding, pay off the bond in full and move on with the project. I had a car loan through GMAC and extra money was applied to future payments.   At one point, I received a statement telling me I had 15 months until my next payment was due because I had not marked extra payments as going to principal.