2. What is an Interest?
Interest is the amount paid to the lender for using and
keeping its money. It is a charge that borrower pays to
lender for using or keeping its money for a specified
period. Other factors like inflation, time value of money
and opportunity cost, risk & return are also considered,
when calculating the interest rate.
What is a Principal Amount?
Principal amount is the amount borrowed from the
lender. It doesn’t contain the interest component. For
example, if you have borrowed 500 from a lender with
an interest of 10%, you need to pay 550 after one
month. 500 will be the principal amount and 50 would
be the interest. If you pay after two months, you will pay
600 in total, 500 as a principal amount and 100 as
interest. Principal amount will always remain same. It is
the interest component that increases the amount.
3. What is Default/potential Default?
Default refers to a situation, where borrower fails to pay
off its obligations i.e. payment of loan. This situation is
also called event of default. Potential default is the
chances that borrower might not be available to make
the loan payments in future.
What is Collateral?
Collateral is an item submitted by the borrower to the
lender against the loan as a security. The purpose of the
collateral is to make the lending process secure. If the
borrower fails to make the payments as per the loan
agreement, lender can seize the collateral to recover its
losses. A collateral can be a property or any asset
submitted by the borrower as a security. In UK, term
“security” is used to reflect this concept.
4. What is a Lump Sum Payment?
Lump sum payment means that the borrower will pay the
entire amount owed to the lender in one go on a specified
date or when demanded by the lender.
What is a Regular Payment/s?
Regular payments is a payment made by the borrower to the
lender on the agreed upon time. Lender specifies the interval
and amount. Borrower will pay the any balance due or
remaining amount at the term end.
What is a Regular Payment/s towards principal and interest?
This means that borrower will make the regular payments
plus the interest to the lender on the specified interval. The
borrower will pay the some portion of principal amount and
the interest on that amount. At the end of the term, there will
be no remaining balance.
5. For more information, please visit:
Loan Agreements
