Waterfall Payment

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DEFINITION of 'Waterfall Payment'

A type of payment scheme in which higher-tiered creditors receive interest and principal payments, while the lower-tiered creditors receive only interest payments. When the higher tiered creditors have received all interest and principal payments in full, the next tier of creditors begins to receive interest and principal payments.

INVESTOPEDIA EXPLAINS 'Waterfall Payment'

For example, this type of payment scheme would work for a company repaying more than one loan. Assume this company has three operating loans, all with different interest rates. The company would make principal and interest payments on the more costly loan, and make only interest payments on the remaining two loans. Once the more expensive loan is paid off, the company can make all interest and principal payments on the next, more expensive loan. The process continues until all loans are repaid.

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