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 periodicloan payments, showing the amount ofprincipaland the amount ofinterestthat 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.
FAQs
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.
What does "amount financed" mean? ›
It means the amount of money you are borrowing from the lender, minus most of the upfront fees the lender is charging you.
What is the definition of amount financed in TILA? ›
§ 900.
(a) The following terms used in this subchapter shall have the following meanings: (1) “Amount financed” means: (A) With respect to sales-based financing, the amount of funds to be provided by the financer to the recipient or on the recipient's behalf, minus any prepaid finance charge.
How does financing work? ›
Financing is the process of providing funds for business activities, making purchases, or investing. Financial institutions, such as banks, are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals.
What is the difference between amount financed and total sale price? ›
Amount Financed – The amount of money you're borrowing. Total of Payments – The sum of all of the payments you'll have made by the end of your loan. Total Sale Price – The total cost of your purchase on credit, taking into consideration your down payment.
What is the minimum financed amount mean? ›
In the world of finance, we often come across the term "minimum amount financed." This refers to the smallest sum of money that can be borrowed under a particular scheme, typically represented as a fixed amount.
What is the formula for total amount financed? ›
Fixed Installment Loans The amount financed is what the consumer borrows: Amount financed = cash price - down payment. The total installment price is the Sum of all monthly payments plus the down payment: Total Installment Price = Total of all monthly payments + down payment.
What is the difference between loan amount and amount financed? ›
The amount financed is the principal loan amount minus prepaid finance charges. A prepaid finance charge is a "finance charge" paid by the borrower separately in cash or by check before or at closing of a loan transaction, or withheld from the loan proceeds.
What refers to the amount of a loan? ›
Principal: The amount of debt, exclusive of interest, remaining on a loan. Principal and Interest to Income Ratio: The ratio, expressed as a percentage, which results when a borrower's proposed Principal and Interest payment expenses is divided by the gross monthly household income.
What are the four main disclosures required under TILA? ›
TILA disclosures include the number of payments, the monthly payment, late fees, whether a borrower can prepay the loan without penalty and other important terms. TILA disclosures is often provided as part of the loan contract, so the borrower may be given the entire contract for review when the TILA is requested.
Financing a car means taking out a car loan that you repay over time. When you take out a car loan, you agree to pay back the amount you borrowed, plus interest and any fees, within a set period of time.
Does financing mean making payments? ›
When you finance a car, you make a down payment and then take out an auto loan that allows you to pay off the vehicle over a set period of time. You'll make monthly payments, with interest. You'll want to keep a few factors in mind, including the loan term, any fees, and the monthly payment amount.
Does financing mean debt? ›
Debt financing refers to taking out a conventional loan through a traditional lender like a bank. Equity financing involves securing capital in exchange for a percentage of ownership in the business. Finding what's right for you will depend on your individual situation.
Is purchase price the same as amount financed? ›
Amount financed .
This is the total amount you are borrowing to purchase the car. It's the dollar amount of the credit being extended to you by the lender. It's typically not the same as the price of the car if you make a down payment.
What is the itemization of the amount financed? ›
For the purposes of this subparagraph, “itemization of the amount financed” means a disclosure of the following items, to the extent applicable: (i) the amount that is or will be paid directly to the consumer; (ii) the amount that is or will be credited to the consumer's account to discharge obligations owed to the ...
Is the amount financed equal to the cash price down payment? ›
Answer. The amount financed is the cash price minus the down payment plus finance charges. A down payment reduces the principal amount that needs to be borrowed, and interest and fees get added to this reduced amount.
What is the amount financed on a car? ›
Amount financed .
This is the total amount you are borrowing to purchase the car. It's the dollar amount of the credit being extended to you by the lender. It's typically not the same as the price of the car if you make a down payment.
Does financed mean a loan? ›
Financing a car means that you are buying the vehicle with money that was loaned to you by a financial institution, like a bank. You can either finance the full cost of a vehicle, or make a down payment using cash, and finance the rest of the purchase.
What does financed mean on a car? ›
When you finance a car, you take out a loan to purchase the vehicle and then pay back that loan over time. As with other types of loans, you must agree to pay back the amount you borrowed as well as interest and fees.
