Question

Describe the features of, and calculate the finance charges on, single-payment loans

Answer 1

A single payment loan involves a single /lumpsum repayment of the entire principal, along with interest, on the date of maturity(as agreed between the borrower & the lender) of the loan--unlike installment loans which are paid in a frequency as agreed between them.

The characteristics of single payment loans are as follows:

1. They are in majority of the cases, borrowed for a short period.

2. the entire expense can be foreseen ,upfront & hence arranged in advance , by the borrower.

3.Normally resorted to, when the loan required is relatively small, so that interest expenses may be considerably less.

4. Generally, single payment loans are availed , if the borrower is sure & certain about any income due, right-in -time , to repay the single payment loan along with interest ,if any---just like any employee bonus, expecting to receive which , the borrower opts for a short-term loan.

5. They are less expensive than installment loans , by way of interest.

Single payment loans calculate their finance charges , ie. Interest charges,for the use of their money , on the prevailing percentages , which normally works out to bigger APR compared to installment loans.

Some lenders advance a discount loan , whereby the interest amount for the full loan & its duration is deducted , before the loan amount is given , ie.loan proceeds = the loan-interest .

Some others charge interest on simple interest basis , where interest on daily basis is calculated using a daily interest rate.

The amount of interest/finance charge is calculated, while issuing the loan & informed to the borrower and added to the loan amount.