Amortized Loan  Normal
The most common method of repaying an interestbearing loan
is by amortization. In this method, a series
of periodic payments is made. The indebtedness at any time
is called the outstanding balance
or outstanding principal. It is just the
discounted value of all unmade payments.
Each sequential payment pays the interest on the unpaid
balance and also repays a part of the outstanding principal.
Over the term of the loan, as the outstanding principal decreases,
the interest portion of each payment decreases and the principal
portion increases. This shifting distribution is shown in an
amortization schedule. Amortized loan is calculated
according to this schedule. Payments are set up using the
formula given below.
RULE OF 78's
The difference between the above method and Rule of 78's is
that, in the Rule of 78's, the interest portion of each payment
is not determined by the unpaid balance, but rather by a
calculation which is called Rule of 78's. This may result in a
different distribution shift than described above. As well, if a
loan is paid off early, with Rule of 78's computing, a borrower
does not receive as much of an interest refund as in other
forms of borrowing.
Please see Rule of 78's for details and formulas used in this
type of calculation.
Amortized Loan Information
In the Interest Detail form, the Operator enters:
Annual Interest Rate  as a percent, e.g. 15. This is the Annual
rate of interest. When Period is more frequent than Annual, Interest
rates are calculated for the Period using the formula  R/n
Period  pick a Period from the list. This is a frequency of interest
conversion (compounding) and a frequency of payment. Collect! uses
this information to determine how often to compound Interest. It also
states how often a debtor is scheduled to make a payment.
Rate Basis  360, 364 or 365 days, or Ordinary  12 months. This is
the length of the year.
Calculate Interest From Date  the date you want calculation to begin.
Term  this is the Total Number of Payments. It is NOT in the formula
below. If the debtor is paying monthly for four years, that means 12
payments for 4 years so Term = 48.
First Payment Date  the date you want the first payment to be due.
These are the basic values that Collect! needs to set up
the preamortization schedule and display results of calculations. There
are additional options you can choose. Press F1 in the Interest Detail
form for information on the field you are wondering about.
Payment Amount
Collect! uses the following formula to calculate Payment
amount. The Operator enters the information listed above
and Collect! performs the necessary calculations.
Payment Amount
P = Payment
A = Amount borrowed
R = Annual Interest Rate
n = number of compound payments per year. This is how often the
interest is compounded, (the Period.) (e.g. Quarterly period: n = 4,
Bimonthly period: n = 6)
R/n = the Interest Rate of a Compounding Period. This divides the
Annual rate by the number of times a year the interest is
compounded (the number of periods.)
T = time in years. This is the number of years allowed to pay off
the loan. This calculation takes into consideration the Rate Basis
set in the Interest Detail.
nT = Term, the total number of payments in the loan schedule. This
is the number of periods per year multiplied by the number of years.
This is the exponent. In the formula, 1 + the Interest Rate(R/n) is
multiplied by itself as many times as the value of the Term(nT).
Example:
$2000 borrowed at 5% for 2 years with Monthly payments.
Plugged into the formula:
((2000 x .05) / 12) x (1 + .05 / 12) (multiplied by itself 24 times)
Divided by (1 + .05 / 12)(multiplied by itself 24 times) minus 1
Approximately, this results in 8.3333 x 1.10494 divided by .10494
which gives a monthly payment of $87.74.
Total Plan Payments
Total Plan Payments amount is calculated as follows:
TP = P x T
TP = Total Plan Payments
P = Payment Amount
T = number of Payments (Term)
In our example, this is 87.74 x 24 = $2105.76
If the Set Terms Manually switch is ON, the Payment
Amount is supplied and Payment Amount formula is not used.
Total Interest
To calculate the Total Interest, the following is used:
TI = TP  A
TI = Total Interest
TP = Total Plan Payments
A = Amount Borrowed
In our example, this is 2105.76  2000 = $105.76
Time In Years
Calculations take into consideration the Rate Basis set in the
Interest Detail. This Rate Basis is used in every single interest
calculation. It can be set to Ordinary, 360, 364 or 365 days.
See Also
 Rule of 78's
 Interest Detail
 How To Make An Interest Adjustment
 How To Setup Amortized Interest
 How To Use The Amortization Schedule

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