A Simple Guide to Understanding Loan
When it comes to banking and finance, there are many terminologies that are used but today I would like to throw more light on the most commonly used one “Loans”. I will be talking about what a loan is, the types of loans, examples of loans, loan requirements, and how to acquire any type of loan.
In this post:
What is a loan?
A loan in simple terms is the money you borrow from an individual or a financial institution with a promise to back in a period of time with an agreed amount in addition.
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Types of loans
There are many types of loans in the banking and lending industry. See below for a list of types of loans offered by banks and other financial institutions:
1. Personal Loans
2. Auto Loans
3. Student Loans
4. Mortgage Loans
5. Home Equity Loans
6. Credit-builder Loans
7. Debt Consolidation Loans
8. Payday Loans
9. Small Business Loans
10. Title Loans
11. Pawnshop Loans
12. Boat Loans
13. Recreational Vehicle (RV) Loans
14. Family Loans
15. Land Loans
16. Pool Loans
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Examples of loans
Loans for Vacations, Weddings, Emergencies, Medical treatment are personal loans whiles loans for tuition, fees, and living expenses at accredited schools are examples of student loans.
Loan requirements vary from different types of loans to the different types of banks or lending institutions. Below are some of the basic requirements you will have to meet if you want to submit an application for a loan.
- Credit Score and History.
- Debt-to-income Ratio.
- Origination Fee.
How to apply for a loan
Loan applications take different forms. It varies from one loan type to another.
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Loans repayment refers to the fulfillment of an amount borrowed from a financial institution (lender) along with the agreed additional money (interest). There are different types of loan repayments. Usually, loan repayments include a scheduled stage known as the loan repayment schedule.
What is a loan repayment schedule?
Simply put, the act of repaying the loan through a series of scheduled payments generally referred to as EMIs that includes both the principal amount outstanding and the interest component is known as the Repayment Schedule. It is also called an Amortization Table.
Types of loan repayments
- Standard Repayment.
- Extended Repayment.
- Graduated Repayment.
- Income-Contingent Repayment.
- Income-Sensitive Repayment.
- Income-Based Repayment.
How to Calculate Loan Repayments
The payment on a loan can also be calculated by dividing the original loan amount (PV) by the present value interest factor of an annuity based on the term and interest rate of the loan.
What is the loan payment formula?
Loan repayment is calculated by dividing the original loan amount (PV) by the present value interest factor of an annuity based on the term and interest rate of the loan.
Loan Repayment Calculator
Here’s an example: let’s say you get an auto loan for $10,000 at a 7.5% annual interest rate for 5 years after making a $1,000 down payment. To solve the equation, you’ll need to find the numbers for these values:
- A = Payment amount per period
- P = Initial principal or loan amount (in this example, $10,000)
- r = Interest rate per period (in our example, that’s 7.5% divided by 12 months)
- n = Total number of payments or periods
The formula for calculating your monthly payment is:
A = P (r (1+r)^n) / ( (1+r)^n -1 )
When you plug in your numbers, it would shake out as this:
- P = $10,000
- r = 7.5% per year / 12 months = 0.625% per period (0.00625 on your calculator)
- n = 5 years x 12 months = 60 total periods
So, when we follow through on the arithmetic you find your monthly payment:
10,000 (.00625 x (1.00625^60) / ((1.00625^60) – 1)
10,000 (.00625 x 1.45329) / (1.45329 – 1)
10,000 (.00908306 / .45329)
10,000 (.02003808) = $200.38
In this case, your monthly payment for your car’s loan term would be $200.38.
If you have an interest-only loan, calculating the monthly payment is exponentially easier (if you’ll pardon the expression). Here is the formula the lender uses to calculate your monthly payment:
loan payment = loan balance x (annual interest rate/12)
In this case, your monthly interest-only payment for the loan above would be $62.50.
Knowing these calculations can also help you decide which loan type would be best based on the monthly payment amount. An interest-only loan will have a lower monthly payment if you’re on a tight budget, but again, you will owe the full principal amount at some point. Be sure to talk to your lender about the pros and cons before deciding on your loan.