What is a 'Loan Constant'
A loan constant is an interest factor used to calculate the debt service of a loan. The loan constant, when multiplied by the original loan principal, gives the dollar amount of the periodic payment. The loan constant can be used to compare the true cost of borrowing. Given the choice of two loans, a borrower will generally opt for the one with the lower loan constant, since it will have the lower debt service requirement.
BREAKING DOWN 'Loan Constant'
As a simple example, a loan constant of 8% on a loan of $150,000 would imply a debt service requirement of $12,000 annually.
Loan constant tables were widely used in the real estate industry before the advent of financial calculators, since they made it relatively easy to calculate monthly mortgage payments.