Amount Financed

What Is Amount Financed?

Amount financed is the actual amount of approved credit extended to a borrower in a loan from a lender, and if accepted, requires repayment by the borrower.

Key Takeaways

  • The amount financed is the amount of credit made available to a borrower in a loan that requires repayment.
  • The amount financed and the interest rate on a loan are the two main factors that determine the installment payment amount.
  • Most loans follow an amortization schedule.
  • The Truth in Lending Act requires lenders to disclose the amount financed in a borrower's loan documents.

Loan Basics

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. The installment payment, usually monthly, will likely include payment toward the amount financed, the principal, and an additional payment to the interest imposed on the principal loan amount.

An amortization schedule is provided to a borrower and provides a snapshot of the entire loan as well as a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term.

Upfront Fees and Installment Payments

When you have been extended credit by a lender for an amount to finance, the lender may charge you a cost to borrow the money. These upfront fees are required at the closing of the loan application process, will not be included in your installment payments, and are deducted from your amount financed.

For example, if you have a $100,000 loan, but the lender is charging you $5,000 in different types of fees, the amount financed would be $95,000. You would pay the $5,000 at closing, and the balance will determine your interest rate and how much your monthly payments will be.

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 the interest rate on a loan are the two 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 the monthly loan payments required.

Upfront Fees

Amount financed is the amount of credit extended to you. Lenders may require a down payment, a cost to borrow the money, at the closing of the loan application process. When you've paid a partial fee upfront, this reduces your amount financed, during the length of the loan period.

Truth in Lending Disclosure Statement

It is detailed in disclosure documents and settlement statements for the borrower as required by the Truth in Lending Act (TILA). 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 be provided to the consumer within three days of closing the loan. This statement enables borrowers to compare the costs of loans with different lenders.

A Truth in Lending Disclosure Statement should include the following:

  • Annual Percentage Rate: The cost of your credit, or interest, expressed as an annual rate.
  • Finance Charge: The cost of the credit, or interest, expressed in dollars.
  • Amount Financed: The loan amount you applied for and for which you have been approved.
  • Total of Payments: The amount you will have paid after you have made all payments as scheduled during the entire term of the loan.

Special Considerations

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.

Does the Amount Financed Include Interest?

The amount financed does not include interest. The amount financed is often called the principal. The interest rate usually represents a percentage of the amount financed and is added to the principal to calculate the total loan amount required for repayment.

Why Is My Loan Amount and Amount Financed Different?

The amount financed is the loan amount applied for, minus the prepaid charges. The amount financed may be lower than the amount you applied for because it represents a net figure: it's equal to your loan amount minus any prepaid fees.

Does the Amount Financed Include the Downpayment?

No, the amount financed doesn't include the downpayment. A down payment is an initial sum of money or a portion of a purchase price that is required to be paid before a loan will be granted. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default.

Article Sources

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  1. Consumer Protection Financial Bureau. "What Does Amount Financed Mean When Getting a Mortgage?"

  2. Cason Home Loans. "What is a Truth-in-Lending Disclosure and why do I receive it?"

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