Question

A loan amortization schedule allows you to see the amount you are paying towards interest and the outstanding balance of the loan. Since the amount of interest is based on the outstanding principal, you can compute the interest portion directly by multiplying the interest rate by the beginning of the period outstanding balance. When you subtract interest from the overall payment, you see the portion being applied towards the principal, which reduces the ending period outstanding balance, which hence becomes the beginning of the period balance period for the next time period.

Required:

How many times have you been provided an amortization schedule when applying for a loan? Why do you think amortization schedules are important? How should the government mandate loan information disclosure? Write 300 words.

Please write in your own words. Please don't copy from anywhere. Thank You!

Answer 1

We live in an era of mobility and technology where everything, including credit is available with ease at a break-neck pace. They say that easy credit has destroyed every civil society in the past. While that is a little far fetched and efficiencies in the lending process are great for the economy, however it must ensure that there is no compromise with sincerity of the loan arrangements.

We all witnessed how the gaps in regulations for lending processes played a crucial role in the housing collapse of 2008. It's extremely important that the lender makes sure that the person receiving the loan is completely aware of his contractual obligations while entering into a loan agreement.

How many times have I received a loan amortization schedule?

Loan amortization schedules are generally provided by the lender Suo-moto to the customer. These schedules, along with making sure that applicants are aware of key pieces of loan agreement, also serve few other functions such as filing tax returns, preparation of projected balance sheets, budgeting, financial planning and analysis. Therefore, these documents are readily provided by lenders (at a request if not suo moto) and I have always received them while taking a loan

Why are loan amortization schedules important?

As part of the above discussion, loan amortization schedule becomes one of the most important documents in the whole lending process as it gives a bird-eye view of all the payments to be made and received under the loan agreement. Some of the key pieces of information that can be extracted from a loan amortization schedule are as follows:

• Interest rates chargeable under the agreement
• Nature of interest rates (simple/Reducing balance method)
• Details of compounding (Quarterly / Semi-annually / Annually)
• Period-wise details of interest and principal repayments
• Period-wise details of interest to be charged

Therefore, from the perspective of a loan applicant, it's extremely important that such crucial details are absolutely crystal clear and therefore, loan amortization schedule becomes very important.

How does the government mandate loan information disclosure

As discussed above, transparency of loan information is supremely important and it must start from the top, i.e.the regulatory authorities must put in place strong regulations for the said purpose and ensure its implementation. Some of the key steps that could be taken for seamless disclosures are as follows:

• Strong regulations making transparent disclosures of loan information mandatory for lenders
• Creating checks and balances on implementation of the said regulations as part of regulatory and statutory audits of the lenders
• Spreading awareness among the general public about their rights to disclosures
• Creating complaints redressal forums for the public to resort to if they are not treated with transparency with regards to loan information
• Strong penalties for lenders in case of non-compliance