A loan is a contract between a borrower and a lender in which the borrower receives an amount of money (principal) which he is obligated to pay back later. Thousands of loans have been invented since its creation. By the way of payback, most loans can be categorized into the following:
- Pay back a fixed amount periodically, until it matures.
- Pay back altogether in the end
- Pay back a fixed amount (the face value for bond) in the end
Calculator for Paying Back a Fixed Amount Periodically
Use this calculator for calculating mortgages, auto loans, and student loans, etc.
Calculator for Paying Back Altogether in the End
Calculator for Paying Back a Fixed Amount in the End
Use this calculator for calculating bonds or other related financial products.
An interest rate is the percentage of money paid by a borrower to the lender for the use of money. For most loans, the interest is added to the principal so that the interest that has been added also earns interest. Normally loan interest was expressed in APR, which is the interest rate compounded monthly. The normal rate published by banks or APY is the interest rate compounded annually.
Loan Basics for Consumers
Consumers generally seek loans out of financial need, or because they want to acquire something: A car, a vacation, an extension to the home. Loans of this type are quite different from mortgages which finance house purchases.
What characterizes most consumer lending is that it is intended to be relatively short-term. It rarely extends for more than ten years. It may take many different forms: Credit card purchases are a form of consumer loan, even if the consumer pays the purchase back at the end of the month. Short-term loans to help cover bill payments, or even the so-called 'paycheck' loans made just to cover a consumer's salary payment are all forms of consumer lending.
There are two basic kinds of consumer loans: Secured and Unsecured.
A secured loan means that the consumer has put up some form of property in exchange for the money. You might go to a bank, and offer a valuable coin collection up as collateral for a secured loan that permits you to buy a small boat that you wanted. You could, of course, sell your coin collection to get the money, but then you wouldn't have it anymore. By putting it up as collateral, you get to keep it so long as you pay the installments on the loan. Of course, you pay interest on the loan as well.
When you take out an unsecured loan, you simply sign an agreement to pay the loan back. There is no collateral, no property that belongs to you to guarantee repayment. You can obtain a personal loan that unsecured, but there are others that we obtain relatively easily like credit cards and overdrafts. It is quite difficult to obtain a personal loan on an unsecured basis. One must have an excellent credit rating to qualify, and, often, banks will only consider longstanding clients for such loans.
For whatever kind of loan you borrow, you will have to pay interest. Interest is the profit that the bank or lender makes on loan – what it earns for doing business with you.
When you take out a loan, it's important to calculate how much interest you will have to pay on it, based on the rate of interest that the lender is charging you. Add up your interest payments to get the cost of the loan (along with any charges that the bank may impose).
If you seek a loan for your business, much will depend on the credit rating your business has and the length of time it's been up and running. An established business, one that works regularly with a bank, may have no trouble at all getting a loan. A startup, or a small business can, on the other hand, find that getting access to credit is a real struggle. If getting a loan proves difficult, continued shopping for banks or alternative providers is the best route for a business.
Commercial loans are often made on the basis that the principal is repaid in full at the end of the life of the loan, while interest is paid throughout. Loan Calculator Two covers this kind of loan.
Whether you borrow for yourself, or for your business, there are essentially three types of loans you can make, and the loan calculators can show you how to determine the costs.
- Pay back a fixed amount periodically, until it matures. Many consumer loans fall into this category, such as mortgages, auto loans, student loans, etc. With this kind of loan, you will pay part of the principal and interest with each monthly payment. You can see, indicated on Loan Calculator 1, the principal, the interest payment, the number of payments, and the total interest to be paid. You can determine from this, by comparing rates of interest for the same period of time, what the differences are between various offers made by lenders.
- Pay back everything in the end—in other words, when the loan matures, the borrower is obligated to pay the principal plus interest back to the lender in one bulk payment. You can see, indicated on Loan Calculator 2, the principal, and the total interest payment. You can determine from this, by comparing rates of interest for the same period of time, what the differences are between various offers made by lenders.
- Pay back a fixed amount (the face value for bond) in the end. This kind of loan is rarely made except in the form of bonds. When you buy a bond, you pay a fixed amount. When the loan matures, you get that amount back. But, for the period of the loan, you receive interest payments. The Loan Calculator 3 shows how the interest is calculated against the principal.