What is the amount financed?
The financed amount is the actual amount of credit made available to a borrower under a loan. This is the total amount of credit for which a borrower is approved by a lender. The amount financed is an important factor in calculating the installment payments that a borrower will have to pay during the life of the loan.
How the financed amount works
The financed amount is an important component of the costs of a loan. This is a detailed piece of information in the disclosure documents for the borrower as required by Regulation Z and the Loan Truth Act. It is also the basis for calculating the total friction costs of a loan and the loan amortization schedule.
Key points to remember
- The financed amount is the actual amount of credit that must be repaid by the borrower.
- When calculating the lifetime cost of a loan, the financed amount is crucial when calculating the total payments.
- Most loans follow an amortization schedule, although one exception is a block loan, which does not.
- Lenders are required by law to disclose the financed amount in a borrower’s loan documents.
the Loan Truth Act was passed in 1968 and implemented by the Federal Reserve through Regulation Z. The Truth in Lending Act standardizes disclosures to borrowers about the terms of a loan, including how costs are calculated. The law requires that a loan truth disclosure statement – which includes the amount financed – be provided to the consumer within three days of the loan closing. This statement allows borrowers to compare loan costs between different lenders.
Amortization schedules and installment payments
Most loans will require monthly payments. Once approved, monthly loan payments will be calculated based on an amortization schedule generated by the lender.
The amount financed and interest rate on a loan are the two main factors that influence the monthly payments made by the borrower. In the case of a fixed rate loan, the payments will be the same throughout the life of the loan. In the case of a variable rate loan, the amortization schedule will adjust to variable interest rates, resulting in changes in the monthly loan payments required.
Some loans may not require an amortization schedule at all since payments are made in a lump sum. For example, balloon payment loans not require one, as it defers both principal and interest to a lump sum payment.
There are various costs involved in a loan which can be comprehensively analyzed by a borrower. Using a friction cost method can allow a borrower to look at costs from all angles. The friction cost method includes both direct and indirect costs.
Direct costs may include administration fees, point fees, reimbursement of principal and interest. Indirect costs can include the time it takes to apply, get approval, and close the loan agreement. For a borrower, the interest charges and most charges on a loan will generally be based on the total amount of debt financing obtained.