A loan is a contract between a borrower and a lender in which the borrower receives a sum of money (principal) that they are obligated to repay in the future. Most loans can be classified into three categories:
- Amortized Loan: Fixed Payments Paid Periodically Until Loan Maturity
- Deferred Payment Loan: Single Amount Paid at the Maturity of the Loan
- Liaison: Fixed lump sum amount paid at maturity (face or par value of a bond)
Amortized loan: fixed amount paid periodically
Many consumer loans belong to this category of loans whose payments are amortized uniformly over their entire life. Routine payments are made on principal and interest until the loan reaches maturity (it is fully repaid). The best-known amortized loans include mortgages, car loans, student loans and personal loans. In everyday conversation, the word “borrowed” will probably refer to this type, not the one used in the second or third calculation. Below are links to loan calculators in this category that can provide more information or allow specific calculations for each type of loan. Instead of using this loan calculator, it may be more useful to use one of the following for each specific need:
Deferred payment loan: lump sum due at maturity of loan
Many commercial or short-term loans fall into this category. Unlike the first calculation, which is amortized with payments spread evenly over their life, these loans have one lump sum at maturity. Some loans, such as lending, may also have lower routine payments in their lifetime, but this calculation only works for loans with a single payment of principal and interest due at maturity.
Obligation: Fixed lump sum paid at maturity of loan
This type of loan is rarely contracted except in the form of bonds. Technically, bonds are considered a form of loan, but operate differently from more conventional loans in that the payment at maturity of the loan is predetermined. The face or par value of a bond is the amount paid on maturity, assuming the borrower does not default. The term “face value” is used because, when the first issue of bonds in paper form, the amount was printed on the “face”, the front of the certificate. Although the face value is generally only important to indicate the amount received at maturity, it can also be useful when calculating coupon interest payments. Note that this calculator is primarily for zero coupon bonds. After issuing a bond, its value will fluctuate with interest rates, market forces and many other factors. As a result, since the face value due at maturity does not change, the market price of a bond may fluctuate during its term.
The bulk of the loan for borrowers
Almost all loan structures include interest, which is the profit that banks or lenders make on loans. The interest rate is the percentage of a loan paid by a borrower to a lender. For most loans, interest is paid in addition to the repayment of principal. Loan interest is generally expressed as APR, or annual percentage rate of charge, which includes interest and fees. The rate generally published by banks for savings accounts, money market accounts and CDs is the annual percentage return, or APY. It is important to understand the difference between APR and APY. Borrowers seeking loans can calculate the interest actually paid to lenders based on the rates announced using the interest calculator. For more information on or to perform calculations involving APR, please visit the APR Calculator.
Frequency of composition
Compound interest is the interest earned not only on the initial capital but also on the accumulated interest of previous periods. As a general rule, the more frequent the composition, the higher the total amount due on the loan. In most loans, membership is monthly. Use the compound interest calculator to find out about compound interest calculations or to do calculations.
term of the loan
A loan term is the duration of the loan, since the minimum payments required are made each month. The term of the loan can affect the loan structure in many ways. In general, the longer the duration, the longer the interest generated, which increases the total cost of the loan for the borrowers, but reduces the periodic payments.
Ready to consume
There are two basic types of consumer loans: secured and unsecured.
A secured loan means that the borrower has formed a form of asset as collateral before obtaining a loan. The lender receives a lien, which is a right of possession of property belonging to another person until payment of a debt. In other words, the default of a secured loan will give the issuer of the loan the legal capacity to seize the assets pledged as collateral. The most common secured loans are mortgages and auto loans. In these examples, the lender holds the title or deed, which is a representation of the property, until the full repayment of the secured loan. In the event of default on a mortgage, the bank seizes a home, while not paying a car loan means that the lender can repossess the car.
Lenders are generally reluctant to lend large sums of money without any guarantee. Secured loans reduce the risk of borrower default as they risk losing the asset they represent as collateral. If the collateral is worth less than the outstanding debt, the borrower can still be responsible for the rest of the debt.
Secured loans are generally more likely to be approved than unsecured loans and may be a better option for those who would not qualify for an unsecured loan,
An unsecured loan is an agreement to repay an unsecured loan. Because there is no guarantee involved, lenders need a way to check the financial integrity of their borrowers. This goal can be achieved through the use of the five credit criteria, which is a common method used by lenders to assess the creditworthiness of potential borrowers.
- Character -May include credit history and reports to present a borrower’s history of debt history, work experience, and income level, as well as outstanding legal considerations
- Capacity – measures a borrower’s ability to repay a loan using a ratio that compares the debt to income
- Capital – refers to any other asset that borrowers may have, other than their income, that can be used to honor a debt, such as a down payment, savings or investments
- Collateral – applies only to secured loans. The guarantee means a pledged element as collateral for the repayment of a loan in the event of default by the borrower.
- Conditions -The current state of the lending climate, industry trends and loan objectives
Unsecured loans generally have higher interest rates, lower borrowing limits and shorter repayment terms than secured loans, mainly because they do not require any collateral. Lenders may sometimes need a co-signer (a person who agrees to pay a borrower’s debt in case of default) unsecured loans if the borrower is deemed too risky. Examples of unsecured loans include credit cards, personal loans and student loans. Please consult our credit card calculator, personal loan calculator or student loan calculator for more information or to perform calculations involving each of them.