Loan Constant
Candlefocus EditorPrinciple is the loan amount, not including interest or other additional expenses such as points or closing costs. The borrower's interest rate determines the total amount they will owe over the life of a loan, so having a lower interest rate may be more beneficial in terms of overall borrowing costs. The frequency of payments usually is monthly and the loan period usually varies from 10 to 30 years.
Once borrowers know the amount of the loan, the interest rate and length, they can use a loan constant table or calculator to determine the debt service of the the loan. The loan constant is the percentage of the loan debt service, which is the total amount of all the payments made over the term of the loan, to the total principal of the loan. Borrowers are often looking for a loan with the lowest loan constant because this indicates a smaller debt service relative to the total principal.
For example, if a borrower wishes to purchase a home for $200,000, and the loan amount is for the same amount, the principal is $200,000. If the length of the loan is 30 years and the interest rate is 3%, then the loan constant for the loan can be calculated using the Loan Constant Table. The resulting number would be 7.21%, which is the annual debt service for a loan of $200,000 at 3% interest over 30 years, expressed in terms of a percentage of the principal.
Knowing the loan constant of a prospective loan is valuable information for borrowers and helps them determine the most suitable loan option for their needs. To calculate the loan constant of a loan before making a commitment can be a smart decision and assist borrowers in making an informed choice.