The Basic Concepts of Loans

Module 9
BASIC CONCEPTS
OF LOANS
2
Learning Objectives
LESSON l
1.Define Business and Consumer Loans
2.Differentiate Business and Consumer Loans
LESSON ll
1.Solve problems on business and consumer loans
(amortization and mortgage).
3
Lesson l
Business and
Consumer Loans
4
What is a
Loan?
A loan is a commitment that you (the borrower) will
receive money from a lender, and you will pay back
the total borrowed, with added interest, over a defined
time period
5
Definition of Terms
Business Loan - money lent specifically for business

purposes. It can be used to start a business or to have a
business expansion.
Consumer Loan - money lent to an individual for personal
or family purpose
Collateral - assets used to secure the loan. It may be real-
estate or other investments
Term of the Loan - time to pay the entire loan
6
Examples
Identify the Type of Loan
“
Mr. Sonny plans to have a barbershop. He wants to
borrow some money from the bank in order for him to
buy the equipment and furniture for the barbershop.
BUSINESS LOAN
“
Mrs. Alejandro wants to have some improvements on
their 15-year old house. She wants to build a new room
for their 12-year old daughter. She will borrow some
money from the bank to finance this plan.
CONSUMER LOAN
“
Mr. and Mrs. Darcy wants to borrow money from the
bank to finance the college education of their daughter.
CONSUMER LOAN
“
Jessie owns a siomai food cart business. He wants to put
another food cart on a new mall in the other city. He
decided to have a loan to establish the new business.
BUSINESS LOAN
“
Aaron owns a computer shop. He has 8 computers. He
decided to borrow some money from the bank to buy 10
more computers.
BUSINESS LOAN
12
Lesson ll
Solving Problems
Involving Business
& Consumer Loans
13
Definition of Terms
Amortization Method - method of paying a loan (principal and
interest) on installment basis, usually of equal amounts at regular
intervals
Mortgage - a loan, secured by a collateral, that the borrower is
obliged to pay at specified terms.
Chattel Mortgage - a mortgage on a movable property
Collateral - assets used to secure the loan. It may be a real-estate or
other investments
Outstanding Balance - any remaining debt at a specified time
14
Example 1
Mr. Garcia borrowed ₱1,000,000.00 for the expansion of his
business. The effective rate of interest is 7%. The loan is to be repaid
in full after one year. How much is to be paid after one year?
Solution:
Given: P = 1,000,000; j = 0.07; n =

1Find: F=?
⇒ An amount of ₱1,070,000.00
must be paid after one year.
15
Example 2
A business loan of 800,000 is to be repaid in full after 2
years. What is the amount to be paid if the effective rate of
interest is 8%?
Solution:
Given: P = 800,000; j = 0.08; n = 2
Find: F=?
⇒ An amount of ₱933,120.00
must be paid after two years.
16
Example 3
If a house is sold for P3,000,000 and the bank requires 20% down
payment, find the amount of the mortgage.
Solution:
Down Payment Amount of the Loan
= (downpayment rate) x (cash price) = ( cash price ) – ( down payment)

= 0.20 (3,000,000) = 3,000,000 - 600,000
= 600,000 = 2,400,000
⇒ The mortgage amount is ₱2,400,000.00

17
Example 4
If a condominium is purchased for P1,700,000 and the bank requires

25% down payment, how much is the mortgaged amount?
Solution:
Down Payment Amount of the Loan
= (downpayment rate) x (cash price) = ( cash price ) – ( down payment)
= 0.25 (1,700,000) = 1,700,000 – 425,000
= 425,000 = 1,275,000
⇒ The mortgage amount is ₱1,275,000.00

18
Outstanding Balance
Recall that the outstanding balance of a loan is the amount of

the loan at this time. One method to compute the outstanding
balance is to get the present value of all remaining payments. This
method is called the prospective method.
19
Outstanding Balance: Time Diagram
We use the symbol to denote the outstanding

balance after k payments. ( the “P” stands for
“prospective”)
20
Example 1
Mrs. Sy borrowed some money from a bank that offers an interest rate of 12%
compounded monthly. Her monthly amortization for 5 years is P11, 122.22.
How much is the outstanding balance after the 12th payment?
Solution:
Find: Present value of 48 future payments (since
Given: R = 11,122.22
there are 48 payments left)
k = 12 number of payments
paid
n – k = 48 since only 48
payments remain ⇒ The outstanding balance is ₱ 422,354. 73
21
Example 2
Mr. and Mrs. Banal purchased a house and lot worth

P4,000,000. They paid a down payment of P800,000. They plan to
amortize the loan of P3,200,000 by paying monthly for 20 years.
The interest rate is 12% convertible monthly.
a. How much is the monthly payment?
b. What is the total interest paid?
22
Example 2
Mr. and Mrs. Banal purchased a house and lot worth P4,000,000. They paid a
down payment of P800,000. They plan to amortize the loan of P3,200,000 by paying
monthly for 20 years. The interest rate is 12% convertible monthly.
a. How much is the monthly payment?
Solution:
Given:
P = 3,200,000.00
n = mt = (12)(20) = 240 ⇒ Therefore, the monthly payment is

Find: Regular Payment R =? ₱35,234.76
23
Example 2
Mr. and Mrs. Banal purchased a house and lot worth P4,000,000. They paid a
down payment of P800,000. They plan to amortize the loan of P3,200,000 by paying
monthly for 20 years. The interest rate is 12% convertible monthly.
b. What is the total interest paid?
Solution:
There are 240 payments of P35,234.76.
Given:
The total payment is 240 × P35, 234.76 = P8, 456,
P = 3,200,000.00
342.40.
The principal is only P3,200,000.
R = 35,234.76
n = 240 Interest Amount = (Total Payments) - (Principal)
= 8, 456, 342.40 - 3, 200, 000 = 5, 256, 342.40
Find: Total interest paid.
⇒ The interest amount is
P5,256,342.40
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Let’s Review!
25
Recapitulation
1. It is money lent especially for a business purpose.

Business
2. It is money lent to an individual for personal or Loan
family Consumer
3. It is an asset that can secure a loan.Collateral
purpose. Loan
4. It is a business loan or consumer loan that is secured with a Mortgage
5. Any remaining debt at a specific time.
collateral. Outstanding Balance
6. It is gradual extinction of a debt, principal, and interest, by sequence
of equal periodic payments or installment payments due at the ends of
Amortization
equal intervals of time.
7. It is a financial obligation of paying someone a certain amount for the use
of his/her money.Loan
26
Sample Problem
Mr. Sia got a P1,100,000 mortgage. If the monthly payment
is P33,000 for five years, how much is the total interest
paid?
Solution:
There are 60 payments of P 33,000.
Given: The total payment is 60 × P 33,000 = P 1,980,000.
P =1,100,000;
The principal is only P1,100,000.
R = 33,000;
n = mt = 12 x 5 = Interest Amount = (Total Payments) - (Principal)
60 =1,980,000-1,100,000 = 880,000
Find: Total interest ? ⇒ The interest amount is P 880, 000

27
Basic
Concepts of
Loans
“Success is not final; failure is not fatal: it is the courage to continue that
counts.”
– Winston Churchill.

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Module 9

Business Loan - money lent specifically for business

Given: P = 1,000,000; j = 0.07; n =

Down Payment Amount of the Loan

= (downpayment rate) x (cash price) = ( cash price ) – ( down payment)

⇒ The mortgage amount is ₱2,400,000.00

If a condominium is purchased for P1,700,000 and the bank requires

Down Payment Amount of the Loan

= (downpayment rate) x (cash price) = ( cash price ) – ( down payment)

= 0.25 (1,700,000) = 1,700,000 – 425,000

⇒ The mortgage amount is ₱1,275,000.00

Recall that the outstanding balance of a loan is the amount of

Outstanding Balance: Time Diagram

We use the symbol to denote the outstanding

Mr. and Mrs. Banal purchased a house and lot worth

n = mt = (12)(20) = 240 ⇒ Therefore, the monthly payment is

1. It is money lent especially for a business purpose.

Find: Total interest ? ⇒ The interest amount is P 880, 000

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