[MUSIC] Welcome to this lecture segment which is part of the borrowing and credit module. In today's lecture, we'll be talking about loan terms and amortization. In this lecture segment, we'll be splitting it up across three parts. In the first part, we're going to just cover the very basic terms of a loan, discuss and distinguish between those key provisions that define a loan contract. In terms of the size of your payment, how often you need to make those payments, the interest rate that you're paying, as well as the amount that you're borrowing. In Part 2 we'll move on and talk more about what is referred to as the loan amortization schedule for a loan contract. So what does that schedule of payments look like over the term that you've borrowed the money. And then finally in Part 3, we'll discuss some of the factors that may affect that loan amortization schedule. So what happens if I make payments not according to that schedule, if my interest rate changes, or again if I vary from that loan amortization schedule that was laid out as part of the original loan contract. So again here in Part 1, we're going to just begin by focusing on some of the very basic terms that define a loan. And the key set of basic rules that define a loan contract include the principal, which refers to the amount that was borrowed by the borrower or the amount lent by the lender, the interest rate that the borrower has agreed to pay and the lender will be charging on that loan. That will determine interest charges that will have to be paid. The term length of the loan, which again will define over what time period those loan payments will be made and the time period over which the loan principal will be paid back. And then finally, payment frequencies, so how often are we actually making loan payments? Are we making those on an annual basis, are we paying our lender every month, or is it some other type of loan frequency? So first we'll talk a little bit about loan principal. So principal is just a word that is used in lending to refer to the amount that is originally borrowed on the loan or at any given time during the loan contract during the repayment period. We will refer to principal as the amount that the borrower still owes the lender. Principal is separate from interest charges, so principal again is the amount borrowed. It's the amount that the borrower will have to pay back over the length of the loan. And then interest charges are added on top of that principal based on the interest rate. Throughout the life of the loan, again, if we're making payments according to the schedule, or maybe making payments even ahead of schedule, or making larger payments than are required, we're going to continually pay that principal balance down until it reaches zero, at which point the loan will be paid off. If we fail to make our payments on time or we make smaller than required payments, we could see our principal increase as interest charges are tacked on to that. But again at any given time, principal refers to how much the borrower currently owes the lender. The interest rate on the loan is what is going to be used to determine what the interest charges that the borrower must pay during any given time period. Interest rates are quoted in percentages and almost always given on an annual basis even if loan payments are not made on an annual basis. Again, interest is going to determine the interest expense, and we'll see once we look at an amortization schedule how different interest rates will affect the amount of interest relative to the amount of principal that is paid off throughout the life of a loan during that repayment period. Term length refers to the amount of time that the borrower has agreed to pay the loan back. So it refers to the length of the loan contract. Just as an example, a very common term length on a home mortgage. So a loan that's used to help finance the purchase of a home for an individual, a very common term length on a loan of that type is a 30-year term. All that means is that the borrower has agreed, at a minimum, to repay the loan back over a 30-year period. Typically the borrower has some flexibility if they would like to make additional payments, early payments, larger payments than that 30-year amortization schedule outlines. They can do that and pay the loan off quicker. But the term of the loan does define the maximum amount of time that the person has to pay it off or the minimum payment that they're going to be required to make during each payment period. And then finally the payment frequency, again, this refers to how often the loan payments are going to be made. So loan contracts may be on an annual payment frequency basis where at the end of every year, you would be required to make a payment. Another very common payment frequency on loan contracts is a monthly frequency. So again at the end of every month the borrower would be required to make a payment to the lender. The payment frequency just simply determines how many payments are going to be made during the year. And again, in the loan amortization schedule, that will be based on the interest rate that is set up in the loan, the term length and then the payment frequency that is defined within that loan contract. [MUSIC]
