Amount financed Definition
What is the amount financed?
The financed amount is the actual amount of credit made available to a borrower under a loan. It is the total amount of credit for which a borrower is approved by a lender. The amount financed is an important factor in calculating the installment payments that a borrower will have to pay over the life of the loan.
How the financed amount works
The financed amount is an important component of the costs of a loan. This is a detailed piece of information in the borrower’s disclosure documents as required by Regulation Z and the Loan Truth Act. It is also the basis for calculating the total friction costs of a loan and the loan amortization schedule.
Key points to remember
- The financed amount is the actual amount of credit that must be repaid by the borrower.
- When calculating the lifetime cost of a loan, the amount financed is crucial for calculating total payments.
- Most loans follow an amortization schedule, although one exception is a lump sum loan, which does not.
- Lenders are required by law to disclose the financed amount in a borrower’s loan documents.
The Truth in Lending Act was passed in 1968 and implemented by the Federal Reserve through Regulation Z. The Truth in Lending Act standardizes disclosures made to borrowers regarding the terms of a loan, including how costs are calculated. The law requires that a loan truth statement, which includes the amount financed, be provided to the consumer within three days of the loan closing. This statement allows borrowers to compare loan costs between different lenders.
Amortization schedules and installments
Most loans require monthly installments. Once approved, monthly loan payments will be calculated based on an amortization schedule generated by the lender.
The amount financed and the interest rate of a loan are the two main factors that influence the monthly 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 to variable interest rates, which will cause changes in the monthly loan payments required.
Some loans may not require an amortization schedule at all since payments are made as a lump sum. For example, lump sum loans do not require one because they carry both principal and interest on a single lump sum payment.
There are different costs involved in a loan which can be comprehensively analyzed by a borrower. Using a friction cost method can allow a borrower to look at costs from all angles. The friction cost method includes both direct and indirect costs.
Direct costs may include administration fees, point fees, repayment of principal and interest. Indirect costs can include the time it takes to apply, get approval, and close the loan agreement. For a borrower, the interest charges and many charges associated with a loan will generally be based on the total amount of loan financing obtained.