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0001 <?xml version="1.0" encoding="UTF-8"?>
0002 <chapter id="details.loans">
0003 <chapterinfo>
0004   <authorgroup>
0005     <author> &Darin.Strait;     &Darin.Strait.mail; </author>
0006   </authorgroup>
0007   <date>2010-07-25</date>
0008   <releaseinfo>4.5</releaseinfo>
0009 </chapterinfo>
0011 <title>Loans</title>
0013 <sect1 id="details.loans.general">
0014 <title>Understanding Loans</title>
0016 <para>
0017   This section provides an overview of how &kmymoney; handles loans.  Loan
0018   regulations and customs vary from locality to locality. For detailed
0019   explanations of loans, as well as information on local regulations and
0020   customs, please see other resources.
0021 </para>
0023 <para>
0024   A loan is an agreement under which a borrower receives money from a lender and
0025   agrees to repay the money at some future date. &kmymoney; allows you to track
0026   loans by which you, as borrower, borrow money from or, as lender, lend money
0027   to someone else. Most individuals borrow more than they lend, so you will
0028   generally be the borrower and a finance company will generally be the
0029   lender. If you lend money to a family member or a friend, you can use
0030   &kmymoney; to keep track of this loan as well.
0031 </para>
0033 <para>
0034   This guide will assume that you are borrowing from some sort of finance
0035   company, but the topics discussed here apply equally well to loans that you
0036   might make to a person. The main difference between borrowing and lending
0037   money is that an expense category is used to keep track of interest when
0038   borrowing money and an income category is used to keep track of interest when
0039   lending money.
0040 </para>
0042 <formalpara><title>Loan Principal</title>
0043 <para>
0044   The amount that is lent out is called the <quote>loan amount</quote> or
0045   <quote>principal</quote>.
0046 </para>
0047 </formalpara>
0049 <formalpara><title>Term</title>
0050 <para>
0051   The period of a loan is called its <quote>term</quote> of the loan. At the end
0052   of the term, the entirety of the principal will have been returned to the
0053   borrower. Terms are generally expressed in weeks, months, or years. A term can
0054   also be expressed by the number of payments. For example, a one year loan with
0055   weekly repayments could be described as a one year loan or a loan with 52
0056   repayments.
0057 </para>
0058 </formalpara>
0060 <formalpara><title>Repayments</title>
0061 <para>
0062   The repayment of the principal to the lender is generally not done as a lump
0063   sum. Instead, a series of repayments are made, each representing a portion of
0064   the principal. Such repayments are sometimes known as <quote>amortization
0065   payments</quote> and in &kmymoney; <quote>Amortization</quote> is defined as
0066   the act of paying off a loan in installments.
0067 </para>
0068 </formalpara>
0070 <formalpara><title>Payment Frequency</title>
0071 <para>
0072   The frequency of installments is referred to as <quote>Payment
0073   Frequency</quote> in &kmymoney;. Examples of period might be weekly,
0074   bi-weekly, monthly, quarterly, or yearly. In the US, periodic payments are
0075   most commonly made every month, therefore the loan's period is one month.
0076 </para>
0077 </formalpara>
0079 <formalpara><title>Interest Rate</title>
0080 <para>
0081   For the privilege of being able to use the money, the borrower will pay the
0082   lender a fee called the <quote>interest</quote>, normally expressed as a
0083   percentage of the amount of the principal over a defined period.  Interest
0084   rates can be fixed, where the interest rate does not change over the lifetime
0085   of the loan, or variable, where the interest rate can change over
0086   time. Typically, interest payments are included with each periodic repayment.
0087 </para>
0088 </formalpara>
0090 <formalpara><title>Periodic Repayments</title>
0091 <para>
0092   Since these repayments are generally made on some sort of scheduled basis,
0093   such as weekly, monthly, quarterly, or yearly, they are referred to as
0094   <quote>periodic repayments</quote>. The sum of all periodic repayments plus
0095   the final repayment will add up to the loan principal plus the interest.
0096 </para>
0097 </formalpara>
0099 <formalpara><title>Fees</title>
0100 <para>
0101   There may be other fees besides interest that are required to be paid with
0102   every installment. These are called <quote>recurring fees</quote>. Examples of
0103   recurring fees include (but are not necessarily limited to):
0105 <!--would prefer itemized list not in para, but formalpara requires para-->
0106 <itemizedlist>
0107   <listitem>
0108     <para>
0109       <quote>Impound</quote> or <quote>escrow</quote> account
0110       payments. (Payments of this sort are commonly used to hold funds to pay
0111       annual or bi-annual property taxes.)
0112     </para>
0113   </listitem>
0115   <listitem><para>Mortgage insurance</para></listitem>
0117   <listitem><para>Disability insurance</para></listitem>
0119   <listitem><para>Loan account maintenance fees</para></listitem>
0120 </itemizedlist>
0121 </para>
0122 </formalpara>
0124 <formalpara><title>Summary</title>
0125 <para>
0126   In summary, the borrower receives a lump sum from the lender at the start of
0127   the loan. The borrower makes a periodic payment to the lender. The periodic
0128   payment is the sum of the principal payment (which is used to pay down the
0129   balance of the loan) plus the interest payment (which rewards the lender for
0130   allowing the use of the money by the borrower) plus any recurring fees (which
0131   cover any incidentals.) At the end of the loan, the borrower has paid back the
0132   entire principal.
0133 </para>
0134 </formalpara>
0135 </sect1>
0137 <sect1 id="details.loans.example">
0138 <title>Example</title>
0139 <para>
0140   For an example, you might borrow $25,000.00 for a new auto and agree to pay
0141   the bank one payment each month for 60 months. The interest rate on the loan
0142   might be 5.5%.
0143 </para>
0145 <para>
0146   In this scenario, the loan amount is $25,000.00. The term of the loan is 60
0147   months or 5 years.  The term of the loan could also be described as 60
0148   payments since there will be one payment per month for 5 years. The repayment
0149   frequency is one month since periodic repayments will be made once a
0150   month. The periodic repayment, which is calculated by &kmymoney;, would be
0151   $477.53.
0152 </para>
0154 <para>
0155   A <quote>loan schedule</quote> is a chart or table that shows the date that a
0156   repayment should be made and the amount of each periodic repayment.  Often,
0157   these schedules break the periodic payment down into its constituent parts:
0158   the principal repayment, the interest payment, and the recurring fees payment.
0159 </para>
0160 </sect1>
0162 <sect1 id="details.loans.creation">
0163 <title>Creating a New Loan</title>
0165 <para>
0166   In &kmymoney;, a loan is a type of account. Therefore, to create a new loan,
0167   you begin by selecting the <menuchoice><guimenu>Account</guimenu><guimenuitem>New
0168   Account</guimenuitem></menuchoice> menu item. Continue by answering the questions that
0169   the wizard poses to you.
0170 </para>
0172 <para>
0173   Optionally, a loan can be associated with a particular institution. If you are
0174   borrowing from a mortgage company or a car loan company, you could create an
0175   institution entry that describes this firm and associate the institution with
0176   your loan. If you are borrowing from your Uncle Ted, there is no requirement
0177   to set up an institution.
0178 </para>
0179 </sect1>
0181 <sect1 id="details.loans.extra-payments">
0182 <title>Making Extra Principle Repayments On Loans</title>
0184 <para>
0185   If you would like to make an extra principal repayment, you can do so.
0186   Simply <link linkend="details.ledger.transactions">enter a transaction</link>
0187   using the ledger.  This extra repayment of principal will be taken into
0188   account for the interest calculation that happens for the next periodic
0189   payment.
0190 </para>
0192 <para>
0193   Examples of extra principal payments include (but are not necessarily limited
0194   to):
0195 </para>
0197 <itemizedlist>
0198   <listitem><para>Contributing an extra $50 a month</para></listitem>
0200   <listitem>
0201     <para>
0202       Doubling the periodic principal repayment for every period. (The principal
0203       repayment can be found for any particular period by referring to the loan
0204       schedule.)
0205     </para>
0206   </listitem>
0208   <listitem>
0209     <para>
0210       Making a 13th principal repayment every year. (This assumes a loan that is
0211       repaid in monthly installments.)
0212     </para>
0213   </listitem>
0214 </itemizedlist>
0216 <note><para>
0217   If you are doubling the principal repaid with every periodic payment,
0218   you will need to recalculate the loan schedule for each installment. This will
0219   allow there to be an accurate value for the required principal repayment with
0220   each installment.
0221 </para></note>
0222 </sect1>
0223 </chapter>