<?xml version="1.0" encoding="UTF-8"?>
<chapter id="details.loans">
<chapterinfo>
  <authorgroup>
    <author> &Darin.Strait;	&Darin.Strait.mail; </author>
  </authorgroup>
  <date>2010-07-25</date>
  <releaseinfo>4.5</releaseinfo>
</chapterinfo>

<title>Loans</title>

<sect1 id="details.loans.general">
<title>Understanding Loans</title>

<para>
  This section provides an overview of how &kmymoney; handles loans.  Loan
  regulations and customs vary from locality to locality. For detailed
  explanations of loans, as well as information on local regulations and
  customs, please see other resources.
</para>

<para>
  A loan is an agreement under which a borrower receives money from a lender and
  agrees to repay the money at some future date. &kmymoney; allows you to track
  loans by which you, as borrower, borrow money from or, as lender, lend money
  to someone else. Most individuals borrow more than they lend, so you will
  generally be the borrower and a finance company will generally be the
  lender. If you lend money to a family member or a friend, you can use
  &kmymoney; to keep track of this loan as well.
</para>

<para>
  This guide will assume that you are borrowing from some sort of finance
  company, but the topics discussed here apply equally well to loans that you
  might make to a person. The main difference between borrowing and lending
  money is that an expense category is used to keep track of interest when
  borrowing money and an income category is used to keep track of interest when
  lending money.
</para>

<formalpara><title>Loan Principal</title>
<para>
  The amount that is lent out is called the <quote>loan amount</quote> or
  <quote>principal</quote>.
</para>
</formalpara>

<formalpara><title>Term</title>
<para>
  The period of a loan is called its <quote>term</quote> of the loan. At the end
  of the term, the entirety of the principal will have been returned to the
  borrower. Terms are generally expressed in weeks, months, or years. A term can
  also be expressed by the number of payments. For example, a one year loan with
  weekly repayments could be described as a one year loan or a loan with 52
  repayments.
</para>
</formalpara>

<formalpara><title>Repayments</title>
<para>
  The repayment of the principal to the lender is generally not done as a lump
  sum. Instead, a series of repayments are made, each representing a portion of
  the principal. Such repayments are sometimes known as <quote>amortization
  payments</quote> and in &kmymoney; <quote>Amortization</quote> is defined as
  the act of paying off a loan in installments.
</para>
</formalpara>

<formalpara><title>Payment Frequency</title>
<para>
  The frequency of installments is referred to as <quote>Payment
  Frequency</quote> in &kmymoney;. Examples of period might be weekly,
  bi-weekly, monthly, quarterly, or yearly. In the US, periodic payments are
  most commonly made every month, therefore the loan's period is one month.
</para>
</formalpara>

<formalpara><title>Interest Rate</title>
<para>
  For the privilege of being able to use the money, the borrower will pay the
  lender a fee called the <quote>interest</quote>, normally expressed as a
  percentage of the amount of the principal over a defined period.  Interest
  rates can be fixed, where the interest rate does not change over the lifetime
  of the loan, or variable, where the interest rate can change over
  time. Typically, interest payments are included with each periodic repayment.
</para>
</formalpara>

<formalpara><title>Periodic Repayments</title>
<para>
  Since these repayments are generally made on some sort of scheduled basis,
  such as weekly, monthly, quarterly, or yearly, they are referred to as
  <quote>periodic repayments</quote>. The sum of all periodic repayments plus
  the final repayment will add up to the loan principal plus the interest.
</para>
</formalpara>

<formalpara><title>Fees</title>
<para>
  There may be other fees besides interest that are required to be paid with
  every installment. These are called <quote>recurring fees</quote>. Examples of
  recurring fees include (but are not necessarily limited to):

<!--would prefer itemized list not in para, but formalpara requires para-->
<itemizedlist>
  <listitem>
    <para>
      <quote>Impound</quote> or <quote>escrow</quote> account
      payments. (Payments of this sort are commonly used to hold funds to pay
      annual or bi-annual property taxes.)
    </para>
  </listitem>

  <listitem><para>Mortgage insurance</para></listitem>

  <listitem><para>Disability insurance</para></listitem>

  <listitem><para>Loan account maintenance fees</para></listitem>
</itemizedlist>
</para>
</formalpara>

<formalpara><title>Summary</title>
<para>
  In summary, the borrower receives a lump sum from the lender at the start of
  the loan. The borrower makes a periodic payment to the lender. The periodic
  payment is the sum of the principal payment (which is used to pay down the
  balance of the loan) plus the interest payment (which rewards the lender for
  allowing the use of the money by the borrower) plus any recurring fees (which
  cover any incidentals.) At the end of the loan, the borrower has paid back the
  entire principal.
</para>
</formalpara>
</sect1>

<sect1 id="details.loans.example">
<title>Example</title>
<para>
  For an example, you might borrow $25,000.00 for a new auto and agree to pay
  the bank one payment each month for 60 months. The interest rate on the loan
  might be 5.5%.
</para>

<para>
  In this scenario, the loan amount is $25,000.00. The term of the loan is 60
  months or 5 years.  The term of the loan could also be described as 60
  payments since there will be one payment per month for 5 years. The repayment
  frequency is one month since periodic repayments will be made once a
  month. The periodic repayment, which is calculated by &kmymoney;, would be
  $477.53.
</para>

<para>
  A <quote>loan schedule</quote> is a chart or table that shows the date that a
  repayment should be made and the amount of each periodic repayment.  Often,
  these schedules break the periodic payment down into its constituent parts:
  the principal repayment, the interest payment, and the recurring fees payment.
</para>
</sect1>

<sect1 id="details.loans.creation">
<title>Creating a New Loan</title>

<para>
  In &kmymoney;, a loan is a type of account. Therefore, to create a new loan,
  you begin by selecting the <menuchoice><guimenu>Account</guimenu><guimenuitem>New
  Account</guimenuitem></menuchoice> menu item. Continue by answering the questions that
  the wizard poses to you.
</para>

<para>
  Optionally, a loan can be associated with a particular institution. If you are
  borrowing from a mortgage company or a car loan company, you could create an
  institution entry that describes this firm and associate the institution with
  your loan. If you are borrowing from your Uncle Ted, there is no requirement
  to set up an institution.
</para>
</sect1>

<sect1 id="details.loans.extra-payments">
<title>Making Extra Principle Repayments On Loans</title>

<para>
  If you would like to make an extra principal repayment, you can do so.
  Simply <link linkend="details.ledger.transactions">enter a transaction</link>
  using the ledger.  This extra repayment of principal will be taken into
  account for the interest calculation that happens for the next periodic
  payment.
</para>

<para>
  Examples of extra principal payments include (but are not necessarily limited
  to):
</para>

<itemizedlist>
  <listitem><para>Contributing an extra $50 a month</para></listitem>

  <listitem>
    <para>
      Doubling the periodic principal repayment for every period. (The principal
      repayment can be found for any particular period by referring to the loan
      schedule.)
    </para>
  </listitem>

  <listitem>
    <para>
      Making a 13th principal repayment every year. (This assumes a loan that is
      repaid in monthly installments.)
    </para>
  </listitem>
</itemizedlist>

<note><para>
  If you are doubling the principal repaid with every periodic payment,
  you will need to recalculate the loan schedule for each installment. This will
  allow there to be an accurate value for the required principal repayment with
  each installment.
</para></note>
</sect1>
</chapter>

