Unit 4 – Day 1 Types of Loans

Secured Loans A loan in which the borrower pledges some asset as collateral. Ex: Mortgages have liens on them until paid off… this means the bank would have the legal right to repossess the house to recover sums owed.

Unsecured Loans Not secured against the borrower’s assets. Interest rates usually higher than secured loans The lender must sue the borrower to get money if not paid back. Ex: credit card debt, bank overdrafts, lines of credit, etc.

Demand Loans Short term loan with no fixed dates for repayment and floating interest rates. Can be “called” for repayment by the lending institution at any time.

Subsidized Loans Interest is reduced by an explicit or hidden subsidy. In context of college loans in US, it refers to loan on which no interest is accrued while a student is still enrolled at a college.

Single Payment Loan A loan you repay with one payment after a specified period of time. Maturity value is calculated with simple interest. When are these used? A business may be short of funds to meet its payroll Construction costs on a house or a building

Installment Loan A loan you repay in equal payments over a specified period of time. Usually Compound Interest Down-payment: Amount of money you have to have upfront. Could be a flat amt or a % of the total price.

Example 1: Anita Sloan’s bank granted her a single-payment loan of $7200 for 91 days to pay for new merchandise for her candle shop. Determine the finance charge. (Aka: the amount of total interest paid.) Determine the maturity value of the loan if the rate is 6%.

Example 2: Sandy added a tack room to her barn costing $4,850 financed at 7% exact interest for 120 days. Find the maturity value of the loan. Find the finance charge.

Example 3: Trudy Quinten is buying gym equipment for $1,399. She makes a $199 down payment and finances the remainder. How much does she finance?

Example 4: Roslyn Clay purchased a piano for $1,140 using the story’s installment credit plan. She made a 20% down payment and financed the remaining amount. What amount did she finance?

Example 5: Lony and Jana are buying a house for $231,500 and are required to pay a 15% down-payment. What is the amount of their down-payment and what is the amount financed?