Lecture 6: Amortization & Business Loan

Question 1

Secured vs. Unsecured Loan

Answer 1

SECURED LOAN- often backed by assets or collateral as part of borrowing conditions [typically lower interest rates because of lower risk)
UNSECURED LOAN- Normally backed by a signed contract, without any collateral [higher interest rate & default is discouraged by escalating late fees per month]

Question 2

Term Loan vs. Revolving Loan

Answer 2

TERM LOAN- Provides the stability of fixed repayments & a predetermined repayment schedule {some borrowers are more favoured}
REVOLVING LOAN- Does not have a fixed repayment schedule, funds can be accessed up to a certain credit limit [e.g. credit cards, line of credit]

Question 3

Amortization Schedule

Answer 3

The process of paying off a debt through schedules, predetermined instalments (incl. principal & interests)

Question 4

Amortization Details (prepayment, amortization period & term)

Answer 4

Prepayment- down payment
Amortization Period- how many years you’ve chosen to pay it back
Term- how often interest will be updated

Question 5

Overdraft def & Equation

Answer 5

A monthly flat fee is normally charged for an overdraft, including interests if the overdrawn amount is not settled within a specific time
Total Overdraft fee payed per day = overdrawn amount x interest rate x number of days /365

Question 6

Amortization Formula

Answer 6

A = P [i (1+ i) n(ex)/ (1+i)n(ex)-1]

Chad’s version: M = [P x r/12 (1+r/12)n (ex)] / (1+r/12)n(ex)

Question 7

Mortgage & Commercial Mortgage

Answer 7

MORTGAGE- A secured loan that is used to finance property that comes with fixed repayment according to an amortization schedule
COMMERCIAL MORTGAGE- A loan given to a business to buy a commercial property

Question 8

Mortgage Interest

Answer 8

Either FIXED-RATE or ADJUSTABLE RATE which normally comes worth a 20% down payment

Question 9

Asset-Based Lending (ABL)

Answer 9

When a lender issues business loans that are secured by collateral
Borrowers usually can obtain up to 50% loan amount based on the value of their physical collateral

Question 10

Collateral (Physical & Liquid)

Answer 10

Physical (Equipment, inventory, real estate)
Liquid (stocks, GICs) [Liquid collateral, normally qualified for higher loan mount and lower interest rate, as they can be easily converted to cash

Question 11

Business Line of Credit

Answer 11

LOC is a revolving loan that gives businesses access to a fixed amount of fund, within an approved credit limit. Like a credit card, the borrower can use the funds up to the capped limit & repay what has been used to make the sum available again.
Includes the flexibility to pay back anytime without early repayment fee.

Question 12

Interest in Business Line of Credit

Answer 12

The interest is only charged based on the AMOUNT WITHDRAWN- NOT THE ACTUAL CREDIT LIMIT