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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>
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