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authortpearson <tpearson@283d02a7-25f6-0310-bc7c-ecb5cbfe19da>2011-07-04 22:38:03 +0000
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+<?xml version="1.0" encoding="UTF-8"?>
+<chapter id="details.loans">
+<chapterinfo>
+ <authorgroup>
+ <author>
+ <firstname>Darin</firstname>
+ <surname>Strait</surname>
+ <affiliation>
+ <address><email>darin.strait@ashdar-partners.com</email></address>
+ </affiliation>
+ </author>
+ </authorgroup>
+<date>2009-08-03</date>
+<releaseinfo>1.0</releaseinfo>
+</chapterinfo>
+
+<title>Loans</title>
+
+<sect1 id="details.loans.general">
+<title>Understanding Loans</title>
+
+<para>
+ This section provides an overview of how &kappname; handles loans. Loan
+ regulations and customs vary from locality to locality. For detailed
+ explanations of loans, as well as information on local regulations and
+ customs, please see other resources.
+</para>
+
+<para>
+ A loan is an agreement under which a borrower receives money from a lender and
+ agrees to repay the money at some future date. &kappname; allows you to track
+ loans by which you, as borrower, borrow money from or, as lender, lend money
+ to someone else. Most individuals borrow more than they lend, so you will
+ generally be the borrower and a finance company will generally be the
+ lender. If you lend money to a family member or a friend, you can use
+ &kappname; to keep track of this loan as well.
+</para>
+
+<para>
+ This guide will assume that you are borrowing from some sort of finance
+ company, but the topics discussed here apply equally well to loans that you
+ might make to a person. The main difference between borrowing and lending
+ money is that an expense category is used to keep track of interest when
+ borrowing money and an income category is used to keep track of interest when
+ lending money.
+</para>
+
+<formalpara><title>Loan Principal</title>
+<para>
+ The amount that is lent out is called the <quote>loan amount</quote> or
+ <quote>principal</quote>.
+</para>
+</formalpara>
+
+<formalpara><title>Term</title>
+<para>
+ The period of a loan is called its <quote>term</quote> of the loan. At the end
+ of the term, the entirety of the principal will have been returned to the
+ borrower. Terms are generally expressed in weeks, months, or years. A term can
+ also be expressed by the number of payments. For example, a one year loan with
+ weekly repayments could be described as a one year loan or a loan with 52
+ repayments.
+</para>
+</formalpara>
+
+<formalpara><title>Repayments</title>
+<para>
+ The repayment of the principal to the lender is generally not done as a lump
+ sum. Instead, a series of repayments are made, each representing a portion of
+ the principal. Such repayments are sometimes known as <quote>amortization
+ payments</quote> and in &kappname; <quote>Amortization</quote> is defined as
+ the act of paying off a loan in installments.
+</para>
+</formalpara>
+
+<formalpara><title>Payment Frequency</title>
+<para>
+ The frequency of installments is referred to as <quote>Payment
+ Frequency</quote> in &kappname;. Examples of period might be weekly,
+ bi-weekly, monthly, quarterly, or yearly. In the US, periodic payments are
+ most commonly made every month, therefore the loan's period is one month.
+</para>
+</formalpara>
+
+<formalpara><title>Interest Rate</title>
+<para>
+ For the privilege of being able to use the money, the borrower will pay the
+ lender a fee called the <quote>interest</quote>, normally expressed as a
+ percentage of the amount of the principal over a defined period. Interest
+ rates can be fixed, where the interest rate does not change over the lifetime
+ of the loan, or variable, where the interest rate can change over
+ time. Typically, interest payments are included with each periodic repayment.
+</para>
+</formalpara>
+
+<formalpara><title>Periodic Repayments</title>
+<para>
+ Since these repayments are generally made on some sort of scheduled basis,
+ such as weekly, monthly, quarterly, or yearly, they are referred to as
+ <quote>periodic repayments</quote>. The sum of all periodic repayments plus
+ the final repayment will add up to the loan principal plus the interest.
+</para>
+</formalpara>
+
+<formalpara><title>Fees</title>
+<para>
+ There may be other fees besides interest that are required to be paid with
+ every installment. These are called <quote>recurring fees</quote>. Examples of
+ recurring fees include (but are not necessarily limited to):
+
+<!--would prefer itemized list not in para, but formalpara requires para-->
+<itemizedlist>
+ <listitem>
+ <para>
+ <quote>Impound</quote> or <quote>escrow</quote> account
+ payments. (Payments of this sort are commonly used to hold funds to pay
+ annual or bi-annual property taxes.)
+ </para>
+ </listitem>
+
+ <listitem><para>Mortgage insurance</para></listitem>
+
+ <listitem><para>Disability insurance</para></listitem>
+
+ <listitem><para>Loan account maintenance fees</para></listitem>
+</itemizedlist>
+</para>
+</formalpara>
+
+<formalpara><title>Summary</title>
+<para>
+ In summary, the borrower receives a lump sum from the lender at the start of
+ the loan. The borrower makes a periodic payment to the lender. The periodic
+ payment is the sum of the principal payment (which is used to pay down the
+ balance of the loan) plus the interest payment (which rewards the lender for
+ allowing the use of the money by the borrower) plus any recurring fees (which
+ cover any incidentals.) At the end of the loan, the borrower has paid back the
+ entire principal.
+</para>
+</formalpara>
+</sect1>
+
+<sect1 id="details.loans.example">
+<title>Example</title>
+<para>
+ For an example, you might borrow $25,000.00 for a new auto and agree to pay
+ the bank one payment each month for 60 months. The interest rate on the loan
+ might be 5.5%.
+</para>
+
+<para>
+ In this scenario, the loan amount is $25,000.00. The term of the loan is 60
+ months or 5 years. The term of the loan could also be described as 60
+ payments since there will be one payment per month for 5 years. The repayment
+ frequency is one month since periodic repayments will be made once a
+ month. The periodic repayment, which is calculated by &kappname;, would be
+ $477.53.
+</para>
+
+<para>
+ A <quote>loan schedule</quote> is a chart or table that shows the date that a
+ repayment should be made and the amount of each periodic repayment. Often,
+ these schedules break the periodic payment down into its constituent parts:
+ the principal repayment, the interest payment, and the recurring fees payment.
+</para>
+</sect1>
+
+<sect1 id="details.loans.creation">
+<title>Creating a New Loan</title>
+
+<para>
+ In &kappname;, a loan is a type of account. Therefore, to create a new loan,
+ you begin by selecting <menuchoice><guimenu>Account</guimenu><guimenuitem>New
+ Account</guimenuitem></menuchoice>. Continue by answering the questions that
+ the wizard poses to you.
+</para>
+
+<para>
+ Optionally, a loan can be associated with a particular institution. If you are
+ borrowing from a mortgage company or a car loan company, you could create an
+ institution entry that describes this firm and associate the institution with
+ your loan. If you are borrowing from your Uncle Ted, there is no requirement
+ to set up an institution.
+</para>
+</sect1>
+
+<sect1 id="details.loans.extra-payments">
+<title>Making Extra Principle Repayments On Loans</title>
+
+<para>
+ If you would like to make an extra principal repayment, you can do so.
+ Simply <link linkend="details.ledger.transactions">enter a transaction</link>
+ using the ledger. This extra repayment of principal will be taken into
+ account for the interest calculation that happens for the next periodic
+ payment.
+</para>
+
+<para>
+ Examples of extra principal payments include (but are not necessarily limited
+ to):
+</para>
+
+<itemizedlist>
+ <listitem><para>Contributing an extra $50 a month</para></listitem>
+
+ <listitem>
+ <para>
+ Doubling the periodic principal repayment for every period. (The principal
+ repayment can be found for any particular period by referring to the loan
+ schedule.)
+ </para>
+ </listitem>
+
+ <listitem>
+ <para>
+ Making a 13th principal repayment every year. (This assumes a loan that is
+ repaid in monthly installments.)
+ </para>
+ </listitem>
+</itemizedlist>
+
+<para>
+ Note: If you are doubling the principal repaid with every periodic payment,
+ you will need to recalculate the loan schedule for each installment. This will
+ allow there to be an accurate value for the required principal repayment with
+ each installment.
+</para>
+</sect1>
+</chapter>
+