The Banker's Perspective
Updated: Oct 16, 2019
When we borrow money, our biggest concern is whether or not we can make the monthly loan payment. In order to determine what the monthly loan payment will be, the banker needs to know three pieces of information; Loan Amount, Interest Rate, and Length of the loan. All three variables influence what the payment will be. Oftentimes when shopping for a loan, we compare the interest rate and try to get the lowest possible since that results in the lowest monthly payment. We always look at this from the borrower’s perspective and don’t think about the banker’s perspective. We assume it’s the same thing. But it is not.
Federal law requires that a lending institution provide you with a “Truth in Lending” disclosure. This is to ensure that the consumer (you) understand what you are agreeing to when taking out the loan. The disclosure must contain four pieces of information.
Annual Percentage Rate
This is the cost of the credit provided expressed as a yearly rate. This will not be the same as the interest rate of the loan if you are pre-paying interest in the form of discount points, origination fees etc. which typically only come into play when taking out a mortgage. This number helps you compare the cost to borrow money across multiple lenders that may have different fees and requirements.
This is the total amount of interest that you will pay to the lender over the course of the loan assuming that the loan is paid to maturity and not paid off early.
This is the amount of money that you are borrowing.
Total of Payments
This is the total dollar amount that you will pay to the lender over the course of the loan assuming that the loan is paid to maturity and not paid off early.
Let’s assume that you want to borrow $20,000 over 5 years and the bank is offering you a 5% interest rate. This will result in a monthly payment of $377.43. The truth in lending statement would look something like this.
After 5 years, you will have paid $2,645.44 in interest which represents a 13.23% premium over the amount financed.
Now what is the banker’s perspective on all this? Here is the amortization table for the first year of the loan.
After one year, you will have paid $917.99 in interest and $3,611.17 in principal. With respect to the totals at the end of the scheduled payments, you have paid 34.7% of the interest but only 18.1% of the principal. So you have paid proportionally more interest than principal. It is not until around the halfway point in the loan that these numbers converge.
What if there was a way that you could capture those interest payments instead of your bank? The Infinite Banking Concept enables you to do just that. Let me know if you would like to learn more about this powerful personal finance tool.