Using Loans and Credit to Make Purchases

Taking Note of Promissory and Discount Notes

A promissory note is a legal document that requires the borrower to pay back the amount he or she owes at specific time intervals and at a specific fixed rate of interest. With this type of note, you determine the amount of interest-based on the face value — the amount borrowed — and you determine how all the money will be paid back over time. The terms of the note may include the deduction of interest from the amount borrowed — in which case the note is called a discount note.

Facing up to notes that have a full face value

A promissory note in which the interest isn’t deducted has full face value. In other words, you get the full amount of money, and nothing is deducted from what you’re given. When you pay back what you owe, you add the face value (the amount of money borrowed) and the interest and then make arrangements for payment of that sum. The upcoming example shows you the best way to calculate payment amounts when it comes to full face-value loans.

Discounting the value of a promissory note

Suppose you want to borrow $10,000. You arrange for the transaction and sign a promissory note. The note is then discounted — the amount of the interest is deducted from what you’re given. In other words, you don’t have the full $10,000 to work with, but you have to pay the face value, $10,000, back to the lender. Discounting a note isn’t an unusual practice, so make sure you know what you’re getting into. The payments for a discount note are fairly straightforward to determine. You may want to rethink the transaction, though, and increase the amount of the note so that you have more money to work with.

Borrowing with a Conventional Loan

A conventional loan may come in the form of a mortgage on a building, a car or truck loan, a building equity loan, or a personal loan. Loans are available through banks, credit unions, employers, and many other institutions. Your task is to find the best possible arrangement to fit your needs. If you’re comfortable doing the legwork and computations yourself, get out paper, pencil, and a calculator and start searching the newspaper and Internet. If you don’t trust yourself quite yet, find an accountant or financial consultant whom you trust and feel comfortable talking to.

Computing the number of loan payments

You can determine the number of your loan payments using tables of values or a loan calculator. If you’re more of a control person (like me), you probably want to do the computations yourself — just to be sure that the figures are accurate.

Considering time and rate

There’s no question that the amount of money borrowed affects the conditions of a payback. After all, the more you borrow, the more you’re going to owe. But the rate of interest and amount of time needed to repay the money act a bit differently in the overall payback. I explain both of these in the following sections.

Determining the remaining balance

If you borrow money using a 20- or 30-year loan and then, all of a sudden, you have a windfall and want to clear all your debts, you need to know what’s left to pay on your loan. You may not expect to win the lottery, inherit a fortune, or receive some other type of windfall when you take out a loan, but you really should avoid any contracts that penalize you for making an early payment. Get rid of that type of clause, if you can. It won’t hurt anything if you do get that windfall, and you’ll save money if you’re able to settle up before the end of the loan term. By paying yearly, you avoid paying some of the interest. However, most amortized loans build in high-interest payments at the beginning of the payback. So you want to get that windfall early in the game.

Last word

Say that you’ve taken out a loan and arranged for monthly payments over a 20-year period. Then you realize that you’re able to pay a little more than the monthly payment. Is it a good idea to do so? Absolutely! Making payments larger than necessary is a splendid idea. You’ll finish paying off the loan much sooner, and you’ll save lots of money on interest.

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