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Deferred Payment Loans: Lump Sum Due at Maturity

Deferred payment loans, commonly used for commercial and short-term financing, require a single lump-sum repayment of principal and interest at the end of the loan term. Unlike amortized loans with regular payments, these loans accumulate interest over time, with no periodic payments required. Balloon loans, a variation, may include smaller interim payments but still require a substantial final payment at maturity.

Bonds: Lump Sum Repayment at Maturity

Bonds operate differently from traditional loans, as borrowers agree to repay a predetermined amount—known as the face or par value—at maturity. This ensures lenders receive a fixed return, provided there is no default.

Two primary types of bonds include:

• Coupon Bonds: Interest payments are made at fixed intervals (e.g., annually or semi-annually) based on a percentage of the bond’s face value.
• Zero-Coupon Bonds: These bonds are sold at a discount and pay no periodic interest. Instead, the borrower repays the full face value at maturity.

Once issued, a bond’s market value fluctuates due to interest rate changes and market conditions, though its maturity value remains fixed.

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Loan Basics for Borrowers

Interest Rates

Interest is the cost of borrowing and is typically expressed as the Annual Percentage Rate (APR), which includes both interest and fees. In contrast, banks publish savings and investment rates as Annual Percentage Yield (APY), which accounts for compounding. Borrowers can use interest calculators to determine actual repayment costs based on APR.

Compounding Frequency

Compounding determines how often interest is applied to the loan balance. More frequent compounding results in higher overall interest costs. Most loans compound interest monthly.

Loan Term

The loan term refers to the repayment period. Longer terms reduce monthly payments but increase total interest costs, whereas shorter terms offer lower overall interest but require higher periodic payments.

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Types of Consumer Loans

Secured Loans

A secured loan requires collateral—such as a home or car—which the lender can seize if the borrower defaults. Common examples include:

• Mortgages: The lender holds the home title until full repayment. Defaulting can lead to foreclosure.
• Auto Loans: The lender retains ownership rights to the vehicle until the loan is paid in full.

Because they reduce lender risk, secured loans typically offer lower interest rates and higher borrowing limits.

Unsecured Loans

Unsecured loans do not require collateral, making them riskier for lenders. Approval is based on the five C’s of credit:

1. Character – Credit history and financial reliability.
2. Capacity – Debt-to-income ratio and ability to repay.
3. Capital – Additional assets or savings that can cover obligations.
4. Collateral – (Only for secured loans) Assets pledged to secure repayment.
5. Conditions – Economic factors and loan purpose.

Because they carry higher risk, unsecured loans typically have higher interest rates, lower borrowing limits, and shorter repayment terms. Some lenders may require a co-signer—a person who guarantees repayment if the borrower defaults.

If a borrower fails to repay an unsecured loan, lenders may involve collection agencies to recover the debt. Common examples of unsecured loans include:

• Credit Cards
• Personal Loans
• Student Loans

For specific calculations, refer to relevant loan calculators.