Here are layman's definitions of common "loan vocabulary." The examples below use a loan of $10,000 with 10% interest for illustration of how different situations actually compute in dollars.
"Principal" - The amount borrowed the $10,000 noted above.
"Interest only" - You pay only the interest portion of the loan - you may make payments at any interval you can negotiate with the lender - monthly payments are most common. In this case $83.33 per month. You are not paying anything towards the $10,000 owed. While this type of arrangement has low monthly payments, it is the most expensive way to finance a purchase, A $10,000 loan at 10% "interest only" for ten years will cost you $10,000 in interest in addition to the $ 10,000 you borrowed.
"Fully Amortized" - A very common way of arranging payments for a loan. Payments include both principal and interest. In the early years of the loan your payment will be almost all interest, with only a small portion of your payment going against the principal. Towards the end of the loan nearly all your payment goes to principal. The schedule has been calculated in a most complex fashion! If the loan referred to above is "amortized over ten years" the monthly payment would be $132.15 per month. Total interest paid on a $ 10,000 loan at 10% interest, "fully amortize&' over ten years will be $5,880. Be sure to get a copy of a full-payment breakdown when you initiate one of these loans so that you know at any given time just how much principal is owed.
"Balloon Payment" - If you have a loan with "interest only" payments, at the end of the term of the loan you will still owe the $10,000 - when that is due and payable all at once, it is known as a "balloon payment". You could also have a balloon payment if you have a loan amortized over ten years to make for a certain affordable payment schedule, yet have the principal balance owed, payable in a lump sum sooner than ten years. If you know where your money is going to come from at a certain time Latest News, this can be a very smart way to buy. If you are just hoping you'll be able to sell or borrow again before that balloon payment is due, think twice - this is one way people find themselves in foreclosure.
"Assumable" - This means that you may pass on your rights and obligations on the loan to another party.
"Pre-payment Penalty" - Means you have to give the lender extra money if you pay a loan off early. Watch out for this one!
Armed with a basic knowledge of these phrases, you now understand a little better what your obligations are when you sign for that loan. If you don't understand something in the loan papers, ask for advice from somebody who knows the business and who has your best interests at heart. If you need assistance, feel free to give me a call.
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