Net Loan Proceeds: The Money That Actually Reaches You

What net proceeds are

The loan amount in an offer is the sum you agree to repay with interest. The net proceeds are the money that lands in your account or goes out to pay your other bills. The two match only when nothing is taken out before funding. An origination fee, sometimes called a processing or administrative fee, is the charge that most often opens a gap between them.

Regulation Z, the rule under the Truth in Lending Act, has a precise name for the credit you really get: the amount financed. The lender works it out by starting with the loan amount, adding any other financed sums that are not part of the finance charge, and subtracting any prepaid finance charge. A fee withheld at funding is a prepaid finance charge, so it is subtracted, and the amount financed comes out lower than the face of the loan.

Deducted or added on top: two ways to charge a fee

A lender can collect the same fee in two ways, and the offer may not say which until you read the disclosure. Here is a 5% fee on a $10,000 need at 14% for 36 months, both ways. The figures are worked examples computed with the amortization formula, not offers from any lender.

With the fee deducted, you repay $12,304.08 for $9,500 in hand. With the fee added on top, you get the full $10,000 but owe $10,500 and pay interest on the fee itself for three years. The APR is close in both cases because it already counts the fee as a cost of the credit; the deposit is what differs.

How to borrow enough to net the sum you need

If a fee will be taken out and you need a fixed amount, such as a $10,000 repair invoice, ask for a bigger loan. The method is called grossing up.

1. 1 Write down the sum you need to receive, for example $10,000.
2. 2 Convert the fee to a decimal and subtract it from 1. A 5% fee gives 1 − 0.05 = 0.95.
3. 3 Divide the sum by that number: $10,000 ÷ 0.95 = $10,526.32.
4. 4 Round up to the lender's loan increment, here $10,527. The fee is $526.35 and the deposit is $10,000.65.
5. 5 Check the new payment. At 14% for 36 months it is $359.79, with a total of payments of $12,952.44 and an APR of 17.65%.

A flat fee works differently: add it to the sum you need instead of dividing. If the lender's fee has a minimum or a maximum, gross up and then check the fee the lender actually quotes on the larger loan. The net proceeds calculator runs both cases and shows the payment on the grossed-up loan.

Borrowing more costs more, so first ask whether you can pay the fee from savings or choose an offer with no fee. Grossing up keeps the deposit whole; it does not make the fee cheaper.

Other things that can lower the deposit

A fee is not the only reason a deposit runs short. Regulation Z requires the lender either to give you a written breakdown of the amount financed, called an itemization, or to tell you that you have the right to one, with a space to ask for it. The itemization shows where each dollar goes.

• Money sent to other creditors. On a consolidation loan the lender may pay your card or loan balances directly, and only the remainder reaches you.
• Payoff of an earlier loan with the same lender, when you refinance or take a new loan to replace an old one.
• Add-on products financed into the loan, such as optional credit insurance. These raise the amount you owe; see credit insurance and add-ons.

Ask for the itemization before you sign and check each line. A payee you do not recognize, or a charge you did not agree to, is a reason to stop and ask.

Questions to ask before you sign

• Is there an origination fee, and is it a percentage or a flat amount?
• Will the fee be taken out of the loan, added to it, or paid by me at closing?
• What is the amount financed, and may I have the written itemization?
• If I pay the loan off early, is any part of the fee refunded?

The answers belong on the Truth in Lending disclosure, which the lender must give you before you are bound. To see how the fee changes the full price of the loan, read total cost of a loan. Some states limit what a licensed lender may charge up front; check your state's rules.

Questions people ask