A loan is a contract between a borrower and a lender in which the borrower receives an amount of money (principal) that they must repay in the future. Most loans fall into one of three categories:q
Many consumer loans fall into this category, with regular payments that are amortized evenly over their duration. Principal and interest payments are made on a regular basis until the loan is paid off in full. Mortgages, vehicle loans, school loans, and personal loans are among the most common types of amortized loans. The term "loan" will most often relate to this type in ordinary conversation rather than the type used in the second or third computation. The links below lead to calculators for loans in this category that can provide additional information or allow for particular calculations regarding each type of loan. Instead of utilizing this Loan Calculator, you might use any of the following for your unique need:
This category includes many commercial and short-term loans. Unlike the first calculation, which amortizes payments evenly over their lifespan, these loans have a single, huge lump sum due at maturity. Some loans, such as balloon loans, can have smaller recurring payments over their lifespan. Still, this calculation only applies to loans with a single payment of principal and interest due at maturity
This type of loan is rarely made, particularly in the case of bonds. Technically, bonds differ from traditional loans in that borrowers make a predetermined payment at maturity. The face, or par value, of a bond refers to the amount paid by the issuer (borrower) when the bond matures, assuming the borrower does not default. Face value refers to the amount received upon maturity.
Coupon and zero-coupon bonds are two popular bond kinds. Coupon bond interest payments are based on a percentage of the bond's face value. Coupon interest payments are made at predetermined periods, typically annually or semi-annually. Zero-coupon bonds do not pay interest immediately. Instead, borrowers sell bonds at a significant discount to their face value and then repay the face value when the bond matures. Users should be aware that the calculator above performs calculations for zero-coupon bonds.
After a borrower issues a bond, the value fluctuates according to interest rates, market pressures, and a variety of other variables. While this has no effect on the bond's value at maturity, the market price of the bond can fluctuate over time.
Interest Rate
Almost all loan structures involve interest, which is the profit that banks or lenders earn on loans. Borrowers pay lenders an interest rate, which is a proportion of the loan amount. Most loans require payments of both principal and interest. Loan interest is typically stated as APR, or annual percentage rate, which includes both interest and fees. The annual percentage yield (APY) is the rate that banks often post for savings accounts, money market accounts, and CDs. It is critical to grasp the distinction between APR and APY. The Interest Calculator allows borrowers seeking loans to compute the actual interest paid to lenders based on their advertised rates. Please visit the APR Calculator if you want to learn more about or calculate APR.
Compound interest is earned on both the initial principal and the accumulated interest from prior periods. The more frequently compounding occurs, the greater the total amount owed on the debt. Most loans compond monthly. Use the Compound Interest Calculator to learn more about or perform compound interest calculations.
A loan term is the lifetime of the loan, assuming that the mandatory minimum payments are made each month. The loan's term might alter its structure in a variety of ways. Generally, the longer the term, the more interest will be accrued over time, increasing the total cost of the loan for borrowers while decreasing the periodic payments.
There are two types of consumer loans: secured and unsecured
A secured loan requires the borrower to put up some asset as collateral before being awarded the loan. The lender is granted a lien, which is the right to possession of another person's property until the loan is paid. In other words, they are defaulting on a secured loan grants the loan issuer the legal right to confiscate the item pledged as security. Mortgages and vehicle loans are the most frequent forms of secured lending. In these cases, the lender retains the deed or title, which represents ownership, until the secured debt is fully paid. Defaulting on a mortgage often leads to the bank foreclosing on the home; however, failing to pay a car loan allows the lender to repossess the vehicle.
Lenders are often unwilling to provide huge sums of money without any guarantees. Secured loans reduce the risk of default because the borrower risks losing the asset put up as security. If the collateral is worth less than the outstanding amount, the borrower may still be liable for the remaining balance.
Secured loans have a higher possibility of acceptance than unsecured loans and may be a better option for those who would not qualify for an unsecured loan.
An unsecured loan is one for which the borrower agrees to repay the loan without providing collateral. Because there is no collateral involved, lenders want a method to verify their borrowers' financial integrity. This can be accomplished using the five C's of credit, a typical methodology used by lenders to assess the creditworthiness of potential borrowers.
Character—may include:
• Credit history and reports to demonstrate a borrower's capacity to fulfill debt obligations in the past.
• Their work experience and income level.
• Any ongoing legal problems.
Capacity—measures a borrower's ability to repay a loan by comparing their debt to their income.
Capital refers to any other assets that debtors may have, different than income, that can be utilized to meet a loan obligation, such as a down payment, savings, or investments.
Collateral applies only to secured loans. Collateral is something pledged as security for loan repayment in the case of the borrower's default.
Conditions—the current lending climate, industry trends, and what the loan will be utilized for.
Unsecured loans typically have higher interest rates, smaller borrowing limits, and shorter repayment periods than secured loans. Lenders may require a co-signer (a person who agrees to cover a borrower's debt if they default) for unsecured loans if they believe the borrower is dangerous.
If customers do not return their unsecured loans, lenders may hire a collection agency. Collection agencies are companies that reclaim monies for past-due payments or defaulted accounts.
Unsecured loans include credit cards, personal loans, and school loans. Please see our Credit Card Calculator, Personal Loan Calculator, or Student Loan Calculator for more information or to perform calculations on each.