Finance: Installment Loans
Questions Explored:
- What will the monthly payments be for my student loan? Car loan? Mortgage?
- How much interest will I pay? What is the payment schedule?
- How much interest can I save by making extra payments?
Terms:
- Installment loan: loan paid off with equal regular payments
- Mortgage: home loan
- Down payment (on home): typically 10%-20% of the purchase price
- Closing: time at which the loan begins
- Point: fee used to negotiate your interest rate; one point is 1% of the loan amount (the amount paid toward points does not go toward your down payment or your mortgage; it goes to the lender)
- Fixed rate mortgage (FRM): guaranteed that interest rate will not change over the life of the loan
- Adjustable rate mortgage (ARM): interest rate you pay changes when prevailing rates change
- Usually includes a rate cap that can’t be exceeded
- Escrow account: required on almost all mortgages
- Money deposited monthly in this account covers property taxes and insurance
- This money is added to the monthly payment, which is why the monthly payment found by the loan payment formula is an underestimate of what you’ll actually pay each month
Some things to consider:
If your down payment is less than 20%, you may have to pay PMI (private mortgage insurance) each month. This insures the lender against a default. Make sure you know the rules if you will be paying PMI.
ARMs can surprise people. Make sure you know what type of mortgage you are getting into. If your payments are low now but you have an ARM and the prevailing interest rates rise, they can significantly increase!
You may hear that it’s “always better to buy than to rent.” Even if this is economically true in your situation, it’s not always just a matter of the math. It depends on your preferences, lifestyle, what you’re comfortable with, etc.
Rule for an installment loan: The amount of interest paid each payment period of an installment loan is computed on the remaining balance of the loan. The amount paid toward the remaining balance of the loanis found by subtracting the interest payment from the fixed monthly payment.
Comparison from (July 2016)
Loan Type / Current Interest Rate for Undergraduates / Payment will be owed to… / Eligibility requirements?Federal Perkins Loan / 5% / The college that made the loan / Based on financial need
Direct Subsidized Loan / 4.29% / U.S. Dept of Education / Easy to qualify for
Direct Unsubsidized Loan / 4.29% / U.S. Dept of Education / Easy to qualify for
Direct PLUS Loan / 6.84% / U.S. Dept of Education / Taken out by parents of dependent undergraduates
The link above the table also provides the amount of money a student may take out for each type of loan. Typically you will have to start loan repayment a few months after you graduate. The federal government does offer different types of repayment options such as standard repayment, full deferral, extended repayment, income-based repayment, income-sensitive repayment, etc. See for details.
Private loans are based on your creditworthiness, not your financial need! If you have a cosigner on your private student loans, their creditworthiness is affected by your repayment actions. Private loans may also have higher interest rates and fewer types of repayment plans.
Good source for overall student loan information: