Loan Calculator

Loans are contracts between a lender and a borrower wherein the borrower receives a specific amount of money they are legally obligated to pay back. Typically, loans fall into one of these categories:

Deferred Payment Loan: Returning a Lump Sum Due at Maturity

A deferred payment loan is a loan structure where no payments are made during the loan period. Instead, the entire principal amount, along with the accrued interest, is paid back in one lump sum at the end of the loan term. This type of loan is beneficial for borrowers who may not have the means to make regular payments during the loan period but anticipate having sufficient funds to repay the loan in full at a later date. This is commonly seen in certain types of educational loans or long-term investment projects. However, it's crucial for borrowers to plan accordingly, as the entire debt becomes due at once.

Amortized Loan: Periodically Repaying a Fixed Amount

Amortized loans involve making regular payments over the loan's duration, where each payment includes both principal and interest. The payments are calculated so that the loan is fully paid off by the end of the term. This type of loan is common for mortgages, auto loans, and personal loans. The advantage of an amortized loan is that it provides predictability and a clear timeline for repayment, which can be helpful for budgeting and long-term financial planning.

Bond: Paying Back a Predetermined Amount Due When the Loan Is Due

In the case of a bond, the borrower (issuer) pays back a predetermined face value at the bond's maturity. Throughout the life of the bond, the issuer might also make periodic interest payments, known as coupon payments, to the bondholders. The final lump sum paid at maturity is typically the face or par value of the bond. Bonds are a common way for companies and governments to raise funds for various purposes.

Fundamentals of lending for borrowers

Loan Term

The term of a loan refers to how long it will last. It encompasses the monthly minimum required payments. This term may be affected by the loan’s structure in various ways. Typically, the longer the loan term, the more accrued interest, ultimately raising the total loan cost.

Interest Rate

Most lending structures include interest, the profit banks or lenders make from loans. Borrowers pay the interest rate as a proportion of the loan amount to lenders. Most loans pay interest besides repaying the principal. Loan interest is usually expressed in terms of APR, or annual interest rate, including interest and fees. Banks commonly post the rate for savings accounts, money market accounts, and CDs as the Annual Percentage Yield, or APY.

Understanding the difference between APR and APY is critical. Using an Interest Calculator, borrowers seeking credit can calculate the actual interest paid to lenders based on their advertised rates. For more information about APR or to perform calculations related to APR, visit the APR Calculator.

Compounding Frequency

Compound interest is interest charged not only on the original principal debt but also on the accumulated interest for previous periods. As a general rule, the more often compounding occurs, the higher the total amount payable on the loan. In most loans, complex accrual occurs monthly. Check the Compound Interest Calculator to learn more about or perform compound interest-related calculations.

Consumer Loans

Consumer loans are available in two basic forms, including secured and unsecured.

Secured Loans

Borrowers are typically required to offer up asset as collateral before being granted a secured loan. The lender will be issued a lien. It provides the right to possess property belonging to another person (until the debt is paid off). Ultimately, defaulting on a secured loan enables the issuer to legally seize said asset(s) originally put up as collateral. The two most common secured loans are mortgages and car loans.

When it comes to a home or auto loan, the lender maintains the deed or title to represent ownership. However, once the loan is fully paid, they no longer possess said document. Defaulting on a mortgage typically results in the foreclosure of the home by the bank. Defaulting on a car loan typically means the lender repossesses the vehicle.

Many lenders are hesitant to lend out large amounts of money with little or no guarantee of repayment. Secured loans reduce the risk of defaulting on the borrower’s behalf, considering they stand to lose substantial assets (put up as collateral). If the collateral is worth less than the outstanding debt, the borrower faces liability for repaying the remainder.

Unsecured loans have a lower approval rate than secured loans. They serve as a better option for individuals who struggle to qualify for an unsecured loan.

Unsecured Loans

Unsecured loans serve as an agreement to repay a loan without collateral to back it up. Since no collateral is involved, most lenders need a way to verify the borrower’s financial integrity. For this reason, the five C’s of credit were developed as a standard methodology for lenders to gauge potential borrowers’ creditworthiness. These include:

Capacity Typically measures the ability of the borrower to repay their loan utilizing ratios comparing debt to income.

Character Often includes credit history and reports showcasing the borrower’s track record and overall ability to fulfill debt obligations. This includes work experience, income level, special legal considerations, etc.

Conditions The lending climate’s current state, industry trends, and use of the loan.

Collateral Applies to secured loans only. This refers to a pledge as security for loan repayment should the borrower default.

Capital Encompasses the borrower’s assets, aside from income, including savings, investments, etc. These assets may be used to fulfill debt obligations.

Lenders may require a co-signer, wherein individuals agree to pay a borrower’s debt if they default. A co-signer may be required in unsecured loans if the lender deems the borrower as a risk. Generally, an unsecured loan features higher interest rates, shorter repayment terms, and lower borrowing limits than secured loans.

A lender may hire a collection agency if borrowers fail to repay unsecured loans. Collection agencies act as an avenue to recover funds owed for past payments, including accounts currently in default.

Unsecured loans may include personal loans, student loans, and credit cards. If you need additional information, check our Credit Card Calculator, Personal Loan Calculator, or Student Loan Calculator.