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.

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.

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.