<?xml version="1.0" encoding="UTF-8"?>
<chapter id="details.loans">
<chapterinfo>
  <authorgroup>
    <author> &Darin.Strait; &Darin.Strait.mail; </author>
    <author> &Jack.H.Ostroff; &Jack.H.Ostroff.mail; </author>
  </authorgroup>
  <date>2024-12-01</date>
  <releaseinfo>5.2.0</releaseinfo>
</chapterinfo>
<title>Loans</title>

<sect1 id="details.loans.general"><title>Understanding Loans</title>
<note><title>Feedback requested</title>
  <para>
    <!-- FIXME: do we leave this request in the released version?  Also need 
                decision on expanding about principal -->
    The author would appreciate feedback on whether to expand this section to discuss
    the variation of principal and interest to attain a fixed recurring payment.  It
    is mentioned in the section on actually creating a loan in &kmymoney; but it
    seems it should be mentioned earlier.
  </para>
</note>

<para>
  This chapter describes how &kmymoney; handles loans.  Loan regulations and customs
  vary from locality to locality.  For detailed explanations of loans, as well as
  information on local regulations and customs, please see other resources.
</para>

<para>
  A loan is an agreement under which a borrower receives money from a lender and
  agrees to return the money as one or more repayments in the future.  &kmymoney;
  allows you to track loans by which you, as borrower, receive money from or, as
  lender, give money to someone else.  Most individuals borrow more than they lend,
  so you will generally be the borrower and a finance company will generally be the
  lender.  If you lend money to a family member or a friend, you can use &kmymoney;
  to keep track of this loan as well.
</para>

<para>
  This guide will assume that you are borrowing from some sort of finance company,
  but the topics discussed here apply equally well to loans that you might make to a
  person.  The main difference between borrowing and lending money is that an expense
  category is used to keep track of interest when borrowing money and an income
  category is used to keep track of interest when lending money.
</para>

<sect2><title>Some relevant terms</title>
<formalpara><title>Principal</title>
<para>
  The amount that is borrowed is called the <quote>principal</quote> or <quote>loan
  amount</quote>.
</para>
</formalpara>

<formalpara><title>Term</title>
<para>
  The period or duration of a loan is called the <quote>term</quote> of the loan.  At
  the end of the term, the entirety of the principal will have been returned to the
  lender.  Terms are generally expressed in weeks, months, or years.  A term can also
  be expressed by the number of payments.  For example, a one year loan with weekly
  repayments could be described as a one year loan or a loan with 52 repayments.
</para>
</formalpara>

<formalpara><title>Repayments</title>
<para>
  The repayment of the principal to the lender is generally not done as a lump sum.
  Instead, a series of repayments are made, each representing a portion of the
  principal.  Such repayments are sometimes known as <quote>amortization
  payments</quote> and in &kmymoney; <quote>Amortization</quote> is defined as the
  act of paying off a loan in installments.
</para>
</formalpara>

<formalpara><title>Payment Frequency</title>
<para>
  The frequency of installments is referred to as <quote>Payment Frequency</quote>.
  Examples of this might be weekly, bi-weekly, monthly, quarterly, or yearly.  This
  is also sometimes referred to as the payment period.  In the US, periodic payments
  are most commonly made every month, therefore the loan's period is one month.
</para>
</formalpara>

<formalpara><title>Interest Rate</title>
<para>
  For the privilege of being able to use the money, the borrower will pay the lender
  a fee called the <quote>interest</quote>, normally expressed as a percentage of the
  amount of the principal over a defined period.  Interest rates can be fixed, where
  the interest rate does not change over the lifetime of the loan, or variable, where
  the interest rate can change over time.  Typically, interest payments are included
  with each periodic repayment.
</para>
</formalpara>

<para>
  Note that a loan in &kmymoney; must have an interest rate greater than 0.  Money
  borrowed or lent with no interest must be entered as a liability or asset account.
</para>

<formalpara><title>Periodic Repayments</title>
<para>
  Since repayments are generally made on some sort of scheduled basis, such as
  weekly, monthly, quarterly, or yearly, they are referred to as <quote>periodic
  repayments</quote>.  The sum of all periodic repayments plus the final repayment
  will add up to the loan principal plus the interest.
</para>
</formalpara>

<formalpara><title>Fees</title>
<para>
  There may be other fees besides interest that are required to be paid, possibly
  with every installment. These are called <quote>recurring fees</quote>.  Examples
  of recurring fees include (but are not necessarily limited to):

  <!--would prefer itemized list not in para, but formalpara requires para-->
  <itemizedlist>
    <listitem>
      <para>
        <quote>Impound</quote> or <quote>escrow</quote> account payments.  Payments
        of this sort are commonly used to hold funds to pay annual or bi-annual
        property taxes.
      </para>
    </listitem>

    <listitem><para>Mortgage insurance</para></listitem>

    <listitem><para>Disability insurance</para></listitem>

    <listitem><para>Loan account maintenance fees</para></listitem>
  </itemizedlist>
</para>
</formalpara>
</sect2>

<sect2><title>Summary</title>
<para>
  In summary, the borrower receives a lump sum from the lender at the start of the
  loan.  The borrower makes a periodic payment to the lender.  The amount of the
  periodic payment is the sum of the principal payment (which is used to pay down the
  balance or remaining principal of the loan,) the interest payment (which rewards
  the lender for allowing the use of the money by the borrower,) plus any recurring
  fees (which cover any incidentals.)  At the end of the loan, the borrower has paid
  back the entire principal.
</para>
</sect2>
</sect1>

<sect1 id="details.loans.example"><title>Example</title>
<para>
  For an example, you might borrow $25,000.00 for a new automobile and agree to pay
  the bank one payment each month for 60 months.  The interest rate on the loan might
  be 5.5% per year.
</para>

<para>
  In this scenario, the loan amount is $25,000.00.  The term of the loan is 60 months
  or 5 years.  The term of the loan could also be described as 60 payments since
  there will be one payment per month for 5 years.  The repayment frequency is one
  month since periodic repayments will be made once a month.  The periodic repayment,
  which is calculated by &kmymoney;, would be $477.53.
</para>

<para>
  A <quote>loan schedule</quote> is a chart or table that shows the date that a
  repayment should be made and the amount of each periodic repayment.  Often, these
  schedules break the periodic payment down into its constituent parts: the principal
  repayment, the interest payment, and the recurring fees payment.
</para>
</sect1>

<!-- FIXME: this section needs expanding, screenshots of the new loan wizard, and more dtails on the various entry
     fields.  In particular, it needs an explanation of how fixed payments are calculated by adjusting the amount of
     principal and interest of each payment, sometimes resulting in a final payment different from the others.  -->
<sect1 id="details.loans.creation"><title>Creating a New Loan</title>
<para>
  In &kmymoney;, a loan is a type of account.  Therefore, to create a new loan, you
  begin by selecting the <menuchoice><guimenu>Account</guimenu><guimenuitem>New
  Account</guimenuitem></menuchoice> menu item.  Continue by answering the questions
  that the wizard poses to you.
</para>

<note>
<para>
  The <guilabel>New Account Setup</guilabel> wizard not only sets up a Loan Account,
  but also creates a <guilabel>Scheduled Transaction</guilabel> for the periodic
  payments.  If you try to edit either the Loan Account or the associated Scheduled
  Transaction, you will be presented with the <guilabel>Edit Loan Account
  Wizard</guilabel>.  This allows you to adjust many of the details of the loans, but
  not all.  Unfortunately, some aspects of the Loan Account cannot currently be
  changed, such as the account's parent account.
</para>

<para>
  If you display the <link linkend="details.schedules">Schedules View</link>,
  right-click on any of the listed schedules, and select <guimenuitem>Edit scheduled
  transaction</guimenuitem> from the menu which pops up, &kmymoney; will display the
  <guilabel>Edit scheduled transaction</guilabel> dialog.  In contrast, if you do
  this with a loan schedule, you will be shown the <guilabel>Edit Loan Account
  Wizard</guilabel>, and mentioned above.  However, if you hold down the
  <keycap>&Shift;</keycap> key when you click <guimenuitem>Edit scheduled
  transaction</guimenuitem>, the <guilabel>Edit scheduled transaction</guilabel>
  dialog for the loan will be show, where you can change some of the details of the
  recurring transaction.
</para>

<para>
  Also note that if you delete the schedule associated with a loan, you cannot undo
  this action, and will have to start from scratch, creating a new loan account and
  schedule.
</para>
</note>

<para>
  Optionally, as with any other account, a loan can be associated with a particular
  institution.  If you are borrowing from a mortgage company or a car loan company,
  you could create an institution that describes this firm and associate your loan
  with the institution.  If you are borrowing from your Uncle Ted, there is no need
  to set up an institution.
</para>
</sect1>

<sect1 id="details.loans.extra-payments"><title>Making Extra Principle Repayments On Loans</title>
<para>
  If you would like to make an extra principal repayment, you can do so.  Simply
  <link linkend="details.ledger.transactions">enter a transaction</link> using the
  ledger.  This extra repayment of principal will be taken into account for the
  interest calculation that happens for the next periodic payment.
</para>

<para>
  Examples of extra principal payments include (but are not necessarily limited to):
</para>

<itemizedlist>
  <listitem><para>Contributing an extra $50 a month</para></listitem>

  <listitem>
    <para>
      Doubling the periodic principal repayment for every period.  (The principal
      repayment can be found for any particular period by referring to the loan
      schedule.)
    </para>
  </listitem>

  <listitem>
    <para>
      Making a 13th principal repayment every year. (This assumes a loan that is
      repaid in monthly installments.)
    </para>
  </listitem>
</itemizedlist>

<note>
  <para>
    If you are doubling the principal repaid with every periodic payment, you will
    need to recalculate the loan schedule for each installment.  This will allow
    there to be an accurate value for the required principal repayment with each
    installment.
  </para>
</note>
</sect1>
</chapter>

