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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