What is a Loan Constant?

A loan constant is the total amount paid every year to service a loan. This amount can be used to express the amount of payments made annually in the form of a percentage of the overall loan. Over time, this percentage increases, because the loan total shrinks and people are paying off a higher percentage of the total balance due each year as a result. Loan constants are used in amortization charts and tables and people sometimes use them for personal reference as well.

To determine the loan constant, people find out how much they are paying annually on a loan in the form of both payments of interest and payments on principal. This is easiest to calculate with a fixed rate loan where the percentage of interest remains stable throughout the year. There are loan calculators that can perform this and there are also several formulas that can be used. People who pay fixed monthly payments can simply multiply the payments by 12.

This total amount is the loan constant. To express it as a percentage, people divide it by the total remaining on the loan and then multiply this number by 100 to arrive at a percentage. The percentage can vary, depending on the terms of the loan. When it is recalculated each year, it should grow, showing that more and more of the loan total is being repaid. In the final year of the loan, the loan constant should be 100%, reflecting the fact that the remaining total is going to be paid off by the end of the year.

Historically, lenders used loan constant calculations to determine how to structure payments to ensure that loans were repaid in full with interest on time. Borrowers could also use constants as they organized their finances, applied for refinancing, or determined the size of loans they could safely apply for. Loan constants can also be incorporated into decisions about how much to charge for rentals and leases. If people are making less than the loan constant in income on their properties every year, they will have to pay out of pocket.

When people are applying for financing, they may find it helpful to do some calculations at home before signing any paperwork. There are a number of loan calculators online that people can use to see how much they will pay over the life of a loan. These calculators can be used to compare terms by changing variables such as interest, amount of down payment, and length of the loan. Sales people may elide information or present facts in misleading ways, and doing research independently can be helpful for people wanting to make an informed decision.