Agriculture Reference
In-Depth Information
the total amount borrowed at the time the loan is made. If Doug borrowed $100,000 at 8
percent with two points, his total loan cost would be:
$,
1
00 000
×→ →
0 0
.
8
$,
8
000
interest
+
1
00 000
,
×
0 0
.
2
→→nts
$ ,
2
000
poi
Total cost
→ $,
1
00 000
Thus, a point amounts to 1 percent of the value of the loan.
Another demand that lenders sometimes make is that the borrower purchase a certain
amount of stock in the lending institution, an amount that is determined by the value of the
loan. The lender might require the purchase of one share of stock, valued at $10, for each
$1,000 that is borrowed. In reality, this is a form of discounting that can be used to determine
the effective cost of the loan. Actual or effective interest rates must be revealed to individual
borrowers by commercial lenders under federal truth-in-lending laws, but this law applies
to consumer loans and time purchases. It does not apply to most commercial or business
transactions.
If the loan was repaid in monthly installments, the effective rate of interest would increase
substantially. This rate of interest is called the
annual percentage rate
of interest, or
APR
.
The formula for calculating the APR on an installment loan is as follows:
⎛
⎜
PF
BT
2
××
×+
⎞
⎟
×
APR
=
100
(
1
)
Where:
APR = annual percentage rate of interest
P = payments per year
F = dollars paid in interest
B = amount of capital borrowed
T = total number of payments
If the terms on Doug's loan included an 8 percent interest rate and monthly installment pay-
ments, the APR calculation would be:
⎛
⎜
⎞
⎟
×
12 $8,000
$100,00 12
2
××
APR
=
100
(
+
1
)
=
⎛
$,
$,
192 000
1 300 000
⎞
⎟
×=
APR
100
14 8
.%
⎜
,
The simple interest loan gives the borrower the use of the greatest amount of borrowed
funds for the longest period of time. The discounted and compensating balance loans result
in a slight decrease in the amount of borrowed funds while paying interest on the total
amount for the entire time of the loan, so the borrower pays a higher annual percentage rate.
