What is Amount Financed?
Amount financed is the actual amount of credit made available to a borrower in a loan. It is the total amount of credit a borrower is approved for from a lender. The amount financed is an important factor for calculating the installment payments that a borrower will have to pay over the life of the loan.
How Amount Financed Works
The amount financed is an important component of a loan’s costs. It is one piece of information detailed in disclosure documents for the borrower as required by Regulation Z and the Truth in Lending Act. It also forms the base for calculating the total friction costs of a loan and the loan’s amortization schedule.
- The amount financed is the actual amount of credit that needs to be paid back by the borrower.
- When calculating the lifetime cost of a loan, the amount financed is crucial when calculating the total payments.
- Most loans follow an amortization schedule, although one exception is a balloon payment loan, which does not.
- Lenders are required by law to disclose the amount financed in a borrower's loan documents.
The Truth in Lending Act was passed in 1968 and implemented by the Federal Reserve through Regulation Z. The Truth in Lending Act standardizes the disclosures made to borrowers concerning the terms of a loan, most notably in the way costs are calculated. The Act requires that a Truth in Lending Disclosure Statement—which includes the amount financed—be provided to the consumer within three days of closing the loan. This Statement enables borrowers to compare the costs of loans among different lenders.
Amortization Schedules and Installment Payments
Most loans will require monthly installment payments. Once approved the monthly installment payments on a loan 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 installment payments paid by the borrower. In a fixed rate loan the payments will be the same throughout the life of the loan. In a variable rate loan the amortization schedule will adjust for varying rates of interest which will cause changes in 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 because it defers both the principal and interest to one lump sum payment.
There are various costs involved in a loan that can be analyzed comprehensively by a borrower. Using a friction costs method can allow a borrower to examine costs from all angles. The friction cost method includes both direct and indirect costs.
Direct costs can include application fees, point fees, principal repayment, and interest. Indirect costs may include the time required to apply, obtain approval, and close the loan deal. For a borrower, interest costs and many of a loan’s fees will usually be based on the total amount of loan financing obtained.