Lump sum refers to a type of payment wherein the whole amount is paid all at once. The opposite of lump sum payments are installment payments, which are regular partial payments made over a period of time.
Lump sum payments are not that common when it comes to loan repayment. However, there are instances, such as for demand loans, where the entire loan amount plus interest are paid in whole.
The benefit of paying loans in lump sum is that the entire amount loaned can be used for capital growth. For example, in a lump sum repayment scheme, a loan of $1200 with an annual interest rate of 10% (supposing that the loan applies a simple interest rate) means the borrower will need to pay the entire amount of $1320 after 12 months.
On the other hand, if the repayment scheme calls for a monthly installment, the borrower needs to pay $110 every month. This means that the entire initial capital of $1200 cannot be used as revolving money. Part of it will automatically be set aside to cover the expense associated with repayment. The good thing though about installment schemes is that monthly payments will not be too heavy on the pocket.
Lump sum payments apply not only to loans but to benefits payment as well. Examples of benefits payment that are usually, but not always, given as a lump sum are insurance claims, dividends in stocks, severance pay, and inheritances.
