Difference Between Loan Amount and Disbursed Amount
What is the Loan Amount?
The loan amount is the total sum of money that you apply for or are approved for by the lender. It is the amount you request when you fill out your loan application and is the base figure on which interest is calculated. For example, if you apply for a $100,000 mortgage, the loan amount is $100,000. This figure is determined by several factors including your credit score, income, existing debts, and the lender’s assessment of your ability to repay the loan.
What is the Disbursed Amount?
The disbursed amount is the actual sum of money that is transferred to your account or made available to you after all deductions are made. This is the amount you will actually receive and can use for your intended purpose. The disbursed amount is often lower than the loan amount due to various deductions such as processing fees, insurance premiums, administrative charges, or prepayment of interest.
Key Differences
Deductions: The loan amount may include charges like processing fees, which are deducted before the money is disbursed. For instance, if your approved loan amount is $10,000 and the processing fee is 2%, your disbursed amount will be $9,800.
Insurance Premiums: Lenders may also deduct insurance premiums upfront, reducing the disbursed amount. For example, if the insurance premium is $200, then your disbursed amount might be $9,600 instead of the full $10,000 loan amount.
Interest Rate and EMI Calculations: Interest and EMI (Equated Monthly Installments) are generally calculated based on the loan amount, not the disbursed amount. This means you could be paying interest on the entire loan amount, even if you didn’t receive it in full.
Disbursement in Phases: In some cases, such as in construction loans, the loan amount might be disbursed in phases as per the progress of construction. Each disbursement could be lower than the approved loan amount, with the total disbursed over time.
Why Understanding the Difference Matters
Knowing the difference between the loan amount and disbursed amount is essential for several reasons:
Budgeting: You might need to adjust your budget based on the disbursed amount, which is usually less than the loan amount.
Repayment Planning: Since you are required to repay the full loan amount (including interest), understanding the difference helps in planning your finances better.
Avoiding Surprises: Being aware of the various fees and deductions beforehand can help you avoid surprises when the disbursed amount is less than what you expected.
Example Scenarios
Personal Loan
Let's say you apply for a personal loan of $50,000. The bank approves the loan, but there’s a processing fee of 2%, and an insurance premium of $500 is also deducted. The loan amount is $50,000, but the disbursed amount is:
$50,000 - $1,000 (processing fee) - $500 (insurance premium) = $48,500
In this case, while you requested $50,000, the actual amount you receive in your bank account is $48,500.
Home Loan
Consider a home loan of $300,000. The lender deducts a 1% processing fee and $1,000 for home insurance, so the disbursed amount would be:
$300,000 - $3,000 (processing fee) - $1,000 (insurance) = $296,000
Here, while the loan amount is $300,000, you only receive $296,000 for purchasing your home.
Conclusion
In summary, the loan amount is the total sum you apply for or are approved for, while the disbursed amount is what you actually receive after deductions. Being informed about these terms helps in managing your finances, planning for repayments, and understanding the total cost of the loan.
Understanding these differences can save you from potential financial pitfalls and ensure that you are fully prepared for the responsibilities of taking on a loan.
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