7.1. Basic Concepts

A loan is defined as a financial transaction in which someone pays for the use of someone else’s money. There are many familiar examples of loans: credits cards, auto loans, house mortgages, or a business loan.

7.1.1. Terminology

Before discussing tracking loan in GnuCash specifically, it will be helpful to present a glossary of terminology. The terms presented below represent some of the basic concepts found concerning loans. It is a good idea to become familiar with these terms, or at least, refer back to this list if you encounter an unfamiliar word in the later sections.

  • Amortization - the repayment plan which will insure that a loan is eventually paid off, typically utilizing equal valued monthly payments. These payments are usually split into principal and interest, where the amount of principal per payment increases (and interest decreases) as the amortization period elapses.

  • Borrower - the person or company that receives the money from a loan.

  • Default - when a borrower fails to repay a loan according to the terms agreed upon with the lender.

  • Deferment - a temporary delay in the repayment of a loan.

  • Delinquency - is the term that refers to late payments.

  • Disbursement - amount of the loan paid to the borrower. Some loans have multiple disbursements, meaning the borrower does not receive the full amount of the loan at one time.

  • Interest - the expense charged by the lender to the borrower for the use of the money loaned. This is typically expressed in terms of a yearly percentage charged on the principal borrowed, known as the Annual Percentage Rate or APR.

  • Lender - the company or person who lends money to a borrower.

  • Loan Fee - a processing fee removed from the principal at the time the borrower receives a loan.

  • Principal - the original amount of the loan, or the amount of the original loan that is still owed. When you make a monthly payment on a loan, part of the money pays the interest, and part pays the principal.

  • Promissory Note - the legal agreement between the borrower and lender concerning the loan.