Definitions
Loan Date - The date the loan proceeds are received. A valid date is required. Use the following format 'mm/dd/yyyy'
for example January 31, 2007 is entered as 01/31/2007.
First Payment Date - The date of the first loan payment. A valid date which occurs after the loan date is required.
The first payment date should be 1 month after the Loan date unless you have a special arrangement with the lender.
An example of a special arrange would be a lender offering no payments or interest until 01/01/2007 for a car purchased
in September, 2006.
Loan Amount - The amount of the loan. A valid positive number is required.
Annual Interest Rate - Do not enter the percent (%) sign; enter 0.065 for 6.5%. To convert from a percent to
a number move the decimal two places to the left. A valid number between .001 and .999 is required.
Loan Type - With a Term Loan you know the length of the loan (i.e. 36, 48 months), but do not know how much
the monthly payments will be. With Fixed Payment Loan, you know how much the payments will be, but you don't know
how many payments it will take to pay off the loan.
For accounting purposes, both Term Loans and Fixed Payment Loans are exactly the same. For example, a Term Loan for
$2,000 at 5% interest for 24 months would required 24 - $87.74 payments. A Fixed Payment Loan for $2,000 at 5% interest
with fixed payments of $87.74 would also required 24 - $87.74 payments.
Fixed Payment Loans are used primarily for marketing purposes. For example some credit card companies charge very
high interest rates and require relatively low monthly payments. A low monthly payment combined with a high interest
rate will results in a loan that lasts for an extremely long time. Stating the actual length of the loan, would upset
most customers, but the low monthly payment sounds great, so for marketing purposes the monthly payment is stated and not
the number of payments.
Consider the following. Some credit card companies calculate the monthly payment at 2% of the outstanding balance
and charge about 20% interest. A $2,000 loan at 20% interest and payments of $40 ($2,000 times 2%) would take 109
monthly payments (just over 9 years). By the time the balance is paid off the customer will have paid $2,000 in principle
payments and $2,369.37 interest payments or more than twice what they had borrowed. If the customer borrowed the same
$2,000 at 10% for 24 monthly payments then they would require been required to make higher monthly payments of $92.29.
However, after this loan is paid off the customer will have paid $2,000 in principle payments and only $231.62 in interest.
So the loan with the higher payments would saved the customer $2,137.75 ($2,369.37 - $231.62)!
Required Loan Payments - Monthly payments are comprised of principle which reduces the loan balance and interest
which is cost of borrowing the money. Interest is calculated on the remaining balance of the loan. Since the
monthly payment is always the same amount, as the loan balance gets smaller the interest portion of each payment reduced
and principle portion of each payment is increased.
Extra Payment - An extra payment is a payment of 100% principle. No portion of an extra payment is used to
cover the cost of borrowing the money.
Loan Amortization Schedule - Below is a Loan Amortization Schedule for a $1,000 Loan at 12% interest for 24 months.
The monthly payments are $47.07. The interest portion of each payment is always equal to the previous months balance
times the effective monthly interest rate. The Effective Monthly Interest Rate is equal to the Annual Interest Rate
divided by 12 Months (so 1% for an annual rate of 12%). The principle portion of each payment is always equal to the
total payment less the interest. The interest amount in month 1 equals the loan balance of $1,000 times 1% or $10.
The interest amount in month 21 equals the loan balance in month 20 ($69.95) times 1% or $0.70. The extra payment
in month 8 caused the loan to be fully paid off in month 22 instead of month 24. Interest is calculated on a monthly
basis so a month not on a daily basis, so a short month like February accrues the same amount of interest as January.
Depending on how your lender calculates the interest, there maybe some slight differences month to month.
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