Loan Calculator
A loan is a formal agreement between a borrower and a lender, in which the borrower receives a specific amount of money (called the principal) and agrees to repay it at a later date. Loans generally fall into three main categories:
Amortized Loan: Repaid through fixed, periodic payments until the loan reaches maturity.
Deferred Payment Loan: Repaid in a single lump sum at maturity.
Bond: A type of loan where a predetermined lump sum (the bond’s face value or par value) is paid back at maturity.
Amortized Loan: Fixed Payments
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Deferred Payment Loan: Lump Sum at Maturity
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Bond Loan: Predetermined Amount at Maturity
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Amortized Loan: Paying a Fixed Amount in Installments
Most consumer loans are amortized, meaning borrowers make regular, equal payments until the debt is fully repaid. Each payment includes both principal and interest. Mortgages, auto loans, student loans, and many personal loans fall into this category. When people talk about “loans” in general, they usually mean amortized loans.
Instead of a general loan calculator, you may find these specialized tools more useful:
- Mortgage Calculator
- Auto Loan Calculator
- Student Loan Calculator
- FHA Loan Calculator
- VA Loan Calculator
- Investment Calculator
- Business Loan Calculator
- Personal Loan Calculator
Deferred Payment Loan: Lump Sum at Maturity
Deferred payment loans differ from amortized loans because they require a single large payment of principal and interest at maturity. Some variations, like balloon loans, may include small payments during the loan term, but the full balance is due at the end. These are commonly used for short-term or commercial borrowing.
Bond: Predetermined Lump Sum Paid at Loan Maturity
Bonds are a unique form of lending in which the borrower repays a fixed face value (par value) at maturity. The bond’s market price may fluctuate over its lifetime, but its maturity value remains constant. There are two common types of bonds:
- Coupon Bonds: Provide periodic interest payments (annual or semi-annual) based on a percentage of the face value.
- Zero-Coupon Bonds: Sold at a discount and redeemed at full face value, with no periodic interest payments.
Loan Basics for Borrowers
Interest Rate
Interest represents the cost of borrowing and is usually expressed as APR (Annual Percentage Rate), which includes both the rate and fees. By contrast, APY (Annual Percentage Yield) reflects actual returns for savings or investments. Borrowers can calculate total interest costs using dedicated tools like the Interest Calculator.
Compounding Frequency
Compound interest means interest is charged not only on the principal but also on previously accrued interest. The more frequently it compounds, the higher the total repayment. Most loans compound monthly.
Loan Term
The loan term is the total repayment duration. Longer terms reduce monthly payments but increase the total cost due to more interest accumulation.
Consumer Loan Types
Secured Loans
Secured loans require collateral, such as a house or car. If the borrower defaults, the lender can seize the asset. Mortgages and auto loans are the most common examples. Secured loans usually offer lower interest rates, higher borrowing limits, and a better chance of approval.
Unsecured Loans
Unsecured loans do not require collateral. Instead, lenders evaluate borrowers using the five C’s of credit:
- Character: Credit history, income, employment record, and reliability.
- Capacity: Ability to repay, measured as debt-to-income ratio.
- Capital: Other assets like savings, investments, or down payments.
- Collateral: Applies only to secured loans.
- Conditions: Loan purpose and current lending environment.
Unsecured loans often come with higher interest rates, lower limits, and shorter terms. If a borrower defaults, lenders may use collection agencies. Common examples include credit cards, student loans, and personal loans.