Basic Concepts of Loans
(Business and Consumer Loans)
Learning Targets:
1. define and illustrate business and consumer loans;
2. solve problems involving loan repayment, interest
amount, mortgage and amortization and outstanding
balance.
Consider the two situations:
Situation 1: Mrs. Capili and her family wants to open a
small cafeteria near the high school in their community.
She has a good place for the cafeteria because she will
just use the ground floor of their two-storey house but
the family lacks the capital to start the business. Because
of this, they have decided to borrow money from the
bank.
Situation 2: Andrew is a 25-year old bachelor who
works in an insurance company. He wants to buy a
brand new car. He decided to apply for an auto loan.
Business Loan – money lent specifically for a business purpose. It
may be used to start a business or to have a business
expansion
Consumer Loan – money lent to an individual for personal or family
purpose
Term of the Loan – time to pay the entire loan
Amortization Method – method of paying a loan (principal and
interest) on installment basis, usually of equal amounts at
regular intervals
Outstanding Balance – any remaining debt at a specified time
Practice Exercise 1. Identify whether each of the following examples is a
consumer or business loan.
Example 1. Mr. Agustin plans to have a barbershop. He wants to borrow some
money from the bank in order for him to buy the equipment and furniture
for the barbershop.
Example 2. Mr. and Mrs. Craig want to borrow money from the bank to finance
the college education of their son.
Example 3. Mr. Alonzo wants to have some improvements on their 10-year old
house. He wants to build a new room for their 13-year old daughter. He will
borrow some money from the bank to finance this plan.
Practice Exercise 1. Identify whether each of the following
examples is a consumer or business loan.
Example 4: Mr. Samson owns a siomai food cart business.
He wants to put another food cart on a new mall in the
other city. He decided to have a loan to establish the
new business.
Example 5: Rina has a computer shop. She owns 6
computers. She decided to borrow some money from
the bank to buy 10 more computers.
Mortgage – a loan, secured by a collateral, that the borrower is
obliged to pay at specified terms.
Chattel Mortgage – a mortgage on a movable property
Collateral – assets used to secure the loan. It may be a real-estate
or other investments
If a borrower cannot pay the loan, the lender has a right
to the collateral. The most common collaterals are real
estate property.
Problem 1: Mr. Garcia borrowed P1,000,000 for the expansion of his
business. The effective rate of interest is 7%. The loan is to be
repaid in full after one year. How much is to be paid after one year?
Problem 2: (Chattel mortgage). A person borrowed P1,200,000 for
the purchase of a car. If his monthly payment is P31,000 on a
5-year mortgage, find the total amount of interest.
Problem 3: If a house is sold for 3 million pesos and the bank
requires 20% down payment, find the amount of the
mortgage.
Problem 4: Ms. Rosal bought a car. After paying the downpayment,
the amount of the loan is P400,000 with an interest rate of 9%
compounded monthly. The term of the loan is 3 years. How
much is the monthly payment?
One method to compute the outstanding balance is to get the
present value of all remaining payments. This method is
called the prospective method.
We use the symbol Bk to denote the outstanding balance
after k payments. In other books, pOBk is used (the “p” stands
for “prospective”).
Problem 5: Mrs. Se borrowed some money from a bank that offers
an interest rate of 12% compounded monthly. His monthly
amortization for 5 years is P11,122.22. How much is the
outstanding balance after the 12th payment?
Problem 6: Mr. and Mrs. Banal purchased a house and lot worth P4,000,000.
They paid a down payment of P800,000. They plan to amortize the loan of
P3,200,000 by paying monthly for 20 years. The interest rate is 12%
convertible monthly.
(a) How much is the monthly payment?
(b) What is the total interest paid?
(c) What are the principal and interest components of the 51st payment?
