Loan management Flashcards
The amount of money borrowed or the original sum of money loaned to a borrower.
Principal
The interest rate fluctuates based on market conditions or changes in a reference interest rate.
Variable rate
The percentage charged by the lender for borrowing money, usually expressed as an annual percentage rate (APR).
Interest rate
The interest rate remains constant over the loan term.
Fixed rate
Jerry presented Tom with two loan options:
Loan 1
Principal Amount: Php 100,000
Fixed interest rate: 6%
Loan term: 3 years
Frequency of interest payment: Yearly
Principal amount repaid at end of term
Loan 2
Principal Amount: Php 100,000
Variable interest rate: Prime rate + 2%
Loan term: 3 years
Frequency of interest payment: Yearly
Principal amount repaid at end of term
Prime rate in the next 3 years.
Year 1 = 3%, Year 2 = 5%, Year 3 = 6%
Interest (100,000 x 6%)
6,000
6,000
6,000
Yearly repayment
6,000
6,000
106,000
Total payment
118,000
Interest (100,000 x 3% + 2%)
5,000
Interest (100,000 x 5% +2%)
7,000
Interest (100,000 x 6% + 2%)
8,000
Yearly repayment
5,000
7,000
8,000
Total payment
120,000
The total yearly cost of the loan, including both the interest rate and any associated fees.
APR
Let’s consider you took the loan of Php 50,000 with annual
interest of 5%, to be paid completely at the end of 5 years.
The monthly interest rate would be: r = 0.05/12 = 0.0041667
n = 5 years x 12 months per year = 60 months
A = (0.0041667 * Php 50,000) / (1 - (1 + 0.0041667)^(-60))
A = Php 943.56
Interest = Php 50,000 * 0.0041667 = Php 208.33
Principal = Php 943.56 – Php 208.33 = Php 735.23
Outstanding balance = Php 50,000 – Php 735.23 = Php 49,264.77
Repayment Schedule Example
Formula
A = (P * r) / (1 - (1 + r)-n)
Where:
A = the payment amount per period or monthly amortization
r = the monthly interest rate in the form of decimal
P = the initial principal or loan amount
n = the total number of payments
