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The amount financed is the amount of a loan that is actually given to the borrower. This term became part of the Truth in Lending Act in the United States in 1968, found in Regulation Z; the Truth in Lending Act was developed to make loan disclosure statements standardized among different banks so that borrowers are clear on what they are borrowing and agreeing to. The term "amount financed" is most often used in mortgage loans, and refers to the true amount of the loan financed, minus any finance charges that were prepaid.
In-advance finance charges are used to reduce the amount of interest paid over the life of the loan. This includes items such as points on the loan. Though these charges are initially added into the principal amount of the loan, they are subtracted from that amount in order to determine the amount financed. This is because it is the amount financed that is used to determine the yearly percentage rate, or APR, of the loan. Another way to think of it is the balance due on the loan.
In actuality, the amount financed is a fairly meaningless term. Borrowers are often confused, thinking that since the up-front finance charges are subtracted from the principal amount of the loan that they are borrowing, they will not have to pay them. This is not the case; these charges are paid at closing. This means that if one gets a hypothetical loan for $25,000, then pays $5,000 in prepaid finance charges at closing, the amount financed is $20,000.
In this example, the principal of the loan remains at $25,000; the borrower just paid off $5,000 of it at closing. This means that the amount financed, or the amount actually given to the borrower, is $20,000. This helps to decrease the amount of interest paid throughout the loan. As one can see, this is a fairly simple concept often made more complicated by lending disclosures.
Lenders should explain the concept of amount financed to borrowers, and any questions should be answered by them directly. It is important to read over the statement of disclosure that comes with any loan, and make note of any confusing areas. One should not sign anything that is not clearly understood. It is important to make note of the principal amount of the loan, the length of the loan, the interest rate, whether the interest is fixed or variable, and the monthly payments.
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