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10-10 Credit CH 10]

Cumulative Interest (total amount) of interest paid on this loan with the 18 payment is
th
$455.57. Remember, the total interest this purchase arrangement should generate for the
lender is $773.19. It is simple to calculate that over the next 30 months the lender would
collect an additional ($773.19 − $455.57 =) $317.62 in interest; and the borrower would pay
a balance of principal due of $2,978.09 as indicated in the Ending Balance column of row
18.
Let’s assume that the borrower wants to pay off this loan early. If there exists a
“prepayment penalty” clause in the lending agreement, the lender has every right to receive
all or a portion of the unpaid interest due per the terms of the lending agreement, a
contract, which in this case could amount to the full $317.62 that is remaining. But note
that lending agreements are contracts, and both the borrower and lender must agree to the
terms of the agreement which include “prepayment penalty’s”, along with the loan amount,
down payment requirements, interest rate, length of the loan and the frequency of payments
which can be weekly, monthly, bi-monthly, semi-annually, annually or some other interval
as both parties agree. In our example in Figure 10.2 the agreed payment is monthly. The
borrower has a responsibility to assure themselves that the periodic payment fits within
their budget.

Life of Loans as Liabilities
From an accounting standpoint loans are grouped by the life of the loan and fall into
three categories: (a) Accounts Payable, (b) Notes Payable, and (3) Mortgages. These
categories are segregated by the life of the loan or payment due and may overlap from one
category to another.
(a) Accounts Payable: Salaries and Wages, supplies received on credit due within
30 to 60 days, credit cards and other short term purchases that are consumable
with a payment due from 30 days to 18 months, production loans, and inventory
for sale.
(b) Notes payable: Loans that are usually for working assets which include:
machines, equipment and property improvements. Additionally breeding stock,
such as boars and sows; bulls, cows or heifers, rams and ewes, stallions and
mares, toms or roosters and hens payable from 6 months to 5 years. Machinery
and equipment such as drill presses, Numerical Control lathes, CNC machines,
stamping machines, welding equipment, saws, lathes, milling equipment;
tractors, trailers, harvesters, tillage equipment with a loan payment of 18
months to 7 years; Improvements to real estate, such as laying irrigation, water
and sewage lines, constructing roads and pads, building fences, roof repair, and
replacement of air conditioning equipment. These become a part of buildings or
real estate with a life of 5 to 15 years.
(c) Mortgages: These are applied to the purchase of real estate and businesses.
Loan life could range from 15 years to 30, 40 and 50 years, and can be as low as
7 years.
Fully Amortizing
Loan: A periodic loan When paying off these loans they can be structured as an all cash plus interest payment
payment where, if the or a payment structure established to be monthly over years, every 6 months or quarterly,
borrower makes every 3 months. Loans with monthly payments, such as a house payment is generally
payments according structured to be paid each month with a set interest rate, over an agreed period of years.
to the loan's
amortization Each payment is a level payment, meaning the same amount from month to month, and
schedule, the loan is with the last payment the loan and accrued interest is all paid to a zero balance. This
fully paid off by the describes a fully amortized loan; a loan where each payment pays first the amount of
end of its set term. If interest due and the balance of the payment being credited against principal loan amount.
the loan is a fixed-rate
loan, each fully Fully Amortized Loans
amortizing payment is Loans have a life variance from 6 months to 40 or 50 years. Most homes sold today
an equal dollar require a down payment as a percentage or portion of property value and a loan on the
amount and pays the remaining value. There are also closing costs associated with home purchases that can
interest due first and
the balance of the amount to approximately 2% of the purchase value of the home. The mortgage is normally
payment reduces the paid in equal monthly installments. Each installment includes interest on the unpaid
loan principal. balance and a payment on the principal. The amount applied to the principal increases
with each successive payment because the amount of interest decreases. When a debt is
decreased gradually by payments, it is amortized.

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