Loan Calculator

Loans are contracts between a lender and a borrower wherein the borrower receives a specific amount of money they are legally obligated to pay back. Typically, loans fall into one of these categories:

Deferred Payment Loan

A single lump sum payment is made at the end of the loan period.

Amortized Loan

Payments are made regularly until the debt is paid off.

Bond

At the end of the loan, a predetermined lump sum is paid (the face or par value of a bond)

Deferred Payment Loan: Returning a Lump Sum Due at Maturity

Amortized Loan: Periodically Repaying a Fixed Amount

You can use the following calculator for basic calculations of common loan types, including auto loans, student loans, personal loans, or mortgages.

Bond: Paying Back a Predetermined Amount Due When the Loan Is Due

The following calculator computes the initial value of a bond or loan based on a predetermined face value (paid back upon bond/loan maturity).

Deferred payment loan: lump sum payment at the end of the loan maturity

Many commercial or short-term loans fall into this category. These loans involve a large lump sum payment at the end of the repayment period. Some loans, such as balloon loans, may also have smaller regular payments over the life. This works only for loans with a lump sum payment of all principals and interest at maturity.

Amortized Loan: Payments are made regularly until the debt is paid off

The majority of consumer loans fall into loans known as amortized loans. They feature regular loan payments that are uniformly amortized over their lifetime. These recurring payments are applied to the principal and interest until the loan fully matures. Amortized loans often include car loans, personal loans, and student loans.

Use the Compound Interest Calculator to determine compound interest and related calculations.

Bond: a predetermined lump sum payable at the time the loan is repaid

This type of loan is rare. Generally, bonds differ from conventional loans because borrowers make a predetermined payment at maturity. The face, or par, the value of a bond is the amount paid by the issuer (borrower) at the bond maturity if the borrower does not default. The face value refers to the amount received upon redemption.

Two common types of bonds are coupon and zero-coupon bonds. In coupon bonds, lenders set interest payments on coupons based on face value. Coupon payments occur at predetermined intervals, usually annually or semi-annually. Zero-coupon bonds do not pay interest directly. Borrowers sell bonds at a significant discount to their face value, then pay the face value back when the bonds mature. Users should note that the above calculator is for zero-coupon bonds.

Once a borrower issues a bond, its value will fluctuate depending on interest rates, market forces, etc. It does not change the value of the bond at maturity. But the bond’s market price may still change over the bond's life.

Fundamentals of lending for borrowers

Loan Term

The term of a loan refers to how long it will last. It encompasses the monthly minimum required payments. This term may be affected by the loan’s structure in various ways. Typically, the longer the loan term, the more accrued interest, ultimately raising the total loan cost.

Interest Rate

Most lending structures include interest, the profit banks or lenders make from loans. Borrowers pay the interest rate as a proportion of the loan amount to lenders. Most loans pay interest besides repaying the principal. Loan interest is usually expressed in terms of APR, or annual interest rate, including interest and fees. Banks commonly post the rate for savings accounts, money market accounts, and CDs as the Annual Percentage Yield, or APY.

Understanding the difference between APR and APY is critical. Using an Interest Calculator, borrowers seeking credit can calculate the actual interest paid to lenders based on their advertised rates. For more information about APR or to perform calculations related to APR, visit the APR Calculator.

Compounding Frequency

Compound interest is interest charged not only on the original principal debt but also on the accumulated interest for previous periods. As a general rule, the more often compounding occurs, the higher the total amount payable on the loan. In most loans, complex accrual occurs monthly. Check the Compound Interest Calculator to learn more about or perform compound interest-related calculations.

Consumer Loans

Consumer loans are available in two basic forms, including secured and unsecured.

Secured Loans

Borrowers are typically required to offer up asset as collateral before being granted a secured loan. The lender will be issued a lien. It provides the right to possess property belonging to another person (until the debt is paid off). Ultimately, defaulting on a secured loan enables the issuer to legally seize said asset(s) originally put up as collateral. The two most common secured loans are mortgages and car loans.

When it comes to a home or auto loan, the lender maintains the deed or title to represent ownership. However, once the loan is fully paid, they no longer possess said document. Defaulting on a mortgage typically results in the foreclosure of the home by the bank. Defaulting on a car loan typically means the lender repossesses the vehicle.

Many lenders are hesitant to lend out large amounts of money with little or no guarantee of repayment. Secured loans reduce the risk of defaulting on the borrower’s behalf, considering they stand to lose substantial assets (put up as collateral). If the collateral is worth less than the outstanding debt, the borrower faces liability for repaying the remainder.

Unsecured loans have a lower approval rate than secured loans. They serve as a better option for individuals who struggle to qualify for an unsecured loan.

Unsecured Loans

Unsecured loans serve as an agreement to repay a loan without collateral to back it up. Since no collateral is involved, most lenders need a way to verify the borrower’s financial integrity. For this reason, the five C’s of credit were developed as a standard methodology for lenders to gauge potential borrowers’ creditworthiness. These include:

Capacity Typically measures the ability of the borrower to repay their loan utilizing ratios comparing debt to income.

Character Often includes credit history and reports showcasing the borrower’s track record and overall ability to fulfill debt obligations. This includes work experience, income level, special legal considerations, etc.

Conditions The lending climate’s current state, industry trends, and use of the loan.

Collateral Applies to secured loans only. This refers to a pledge as security for loan repayment should the borrower default.

Capital Encompasses the borrower’s assets, aside from income, including savings, investments, etc. These assets may be used to fulfill debt obligations.

Lenders may require a co-signer, wherein individuals agree to pay a borrower’s debt if they default. A co-signer may be required in unsecured loans if the lender deems the borrower as a risk. Generally, an unsecured loan features higher interest rates, shorter repayment terms, and lower borrowing limits than secured loans.

A lender may hire a collection agency if borrowers fail to repay unsecured loans. Collection agencies act as an avenue to recover funds owed for past payments, including accounts currently in default.

Unsecured loans may include personal loans, student loans, and credit cards. If you need additional information, check our Credit Card Calculator, Personal Loan Calculator, or Student Loan Calculator.