I have a very basic question about a situation that makes absolutely no sense to me. I really need to understand this. When figuring amount financed, why do you subtract prepaid finance charges? If I get a loan for $50,000 and I prepay $100 in interest then (ignoring everything else) the amount financed is $49,900? But I still owe $50,000 of principal because that is what I owe, but it's not the amount financed. Is there something basic about lending that I don't understand?

The purpose of the TIL disclosures is to provide the borrower with the cost of the benefit they receive from the borrowing. You subtract the prepaid interest from the loan amount amount beacuse it is part of the cost of obtaining the credit not part of the credit itself.

Paul is absolutely on target. It comes out of the amount financed, is added into your finance charge(because that $100 is a finance charge) and thus affects your APR calculation. This is one of those calculations that make no sense to any loan officer ever! It's really fun to explain when the customer pays it out of pocket and it's not financed. Same thing occurs - it has to or the APR will not be correct.

I like to think of it this way. The loan amount is the "gross" amount. I owe you this plus simple interest calculated on this. The amount financed is the "net" amount of the loan. This is how much my checking account is increasing. I realize that this may not be the anwer to the question you asked, but I thought it might be helpful.

The way I explain to our folks is, the amount financed equals the funds the borrower actually has for his/her use.