What Are Loan Proceeds?

After you apply for a loan, you may not receive the entire amount straight away and may receive a little less than the amount you applied for.

Understanding the workings of a loan may help you make better financial decisions.

What Are Loan Proceeds?

Loan proceeds are the amount that a lender dispatches to the borrower after paying off any closing fees, like origination or processing fees. It is the net loan amount available to the borrower as part of the loan. It is the amount that the borrower owes to the lender, plus any interest due on the money.

Some of the common fees and expenditures of a loan that the borrower should keep an eye on include:

  1. Origination Fee: The origination fee is what lenders charge borrowers for processing or originating a loan. It can be anywhere between 0.5% to 5% of the loan amount. The origination fee is negotiable, though it may result in higher interest rates for the borrower.
  2. Underwriting Fee: The underwriting fee is the fees that the lender charges for assessing the creditworthiness of the borrower. This is to make sure that the borrower will be able to pay off the loan that they receive.
  3. Broker Fee: This is the fee that the broker or the agent charges for his services in securing the loan for the borrower. It is a percentage of the amount of the loan.
  4. Taxes: Taxes are mostly payable in cases of loans obtained for a property.
  5. Property and Title Insurance: These are insurances payable by the borrower to ensure that they have the right to the title deed and claims to damages to the property. They protect both the lender and the borrower.

Borrowers should read in detail the terms and conditions of the loan so that they are aware of the actual loan amount that they will be eligible for. Loan proceeds can have certain limitations on how they may be used, which will be outlined in the contract. For instance, the loan proceeds from a student loan may only be used to buy textbooks only and not pay for extra-curricular activities.

What Are Mortgage Loan Proceeds?

A mortgage loan application can take anywhere from a month to two months to get processed. After the pre-processing is complete, the amount that is dispatched to the borrower forms the mortgage loan proceeds that are available for the homeowners’ use. It is disbursed from the mortgagor’s cash escrow. It is the loan that is then owed by the borrower to the lender and forms the principal balance of the loan.

What Does Deposit Loan Proceeds Mean?

What Are Proceeds In Finance?

Proceeds refer to all the costs that are available after a sale or transaction. It is a form of revenue generated after a successful contract. If a number of units are sold, the total proceeds are the number of units sold multiplied by the price of one unit. Proceeds can be categorized as gross proceeds or net proceeds.

Gross proceeds are the proceeds available to the seller before any deductions. It is the price decided for the transaction. Gross proceeds include the price of production, such as material costs, labor costs, cost of machinery, and also includes the costs involved with selling the product, such as middlemen fees, the cost of making the contract, and possibly even marketing and advertising costs. Gross proceeds are thus the total cost of the product.

Net proceeds are the proceeds that the seller receives after subtracting off all the underlying costs associated with the transaction. For instance, if you sell your house for $500,000 and your real estate agent charges a commission of 5%, the net proceeds available to you will be $475,000. This is the money you will actually receive from selling the house. In some instances, taxes and costs of processing the contract are also subtracted from the gross proceeds to get the net proceeds.

In the case of a loan, proceeds refer to the net amount available to the borrower after the lender has subtracted the overhead costs of the loan from the total loan amount.

Loan Proceeds Meaning Accounting

In accounting, loan proceeds are especially important in bookkeeping. Bookkeeping is the recording of financial transactions as part of business dealings. It helps in showing where a business is doing well and what areas may need improvement. To calculate the loan proceeds, the accounting department will carry out a calculation that goes something like this:

Step 1: Make a note of how much loan is being given and at what rate.

Step 2: Calculate the expenses you incurred to give the loan. For instance, the various underlying costs like underwriting fee and origination fee, etc. These costs are usually a percentage of the loan.

Step 3: Calculate how much of the loan is payable in these costs.

Step 4: Subtract the costs from the loan approved to get the loan proceeds.

An example of loan proceeds in accounting is covered in the following section.

Loan Proceeds Example

Loan proceeds are applicable in a number of different instances.

For instance, you apply for a mortgage loan of $100,000. Your lender may charge a 2% origination fee and 1% in underwriting. The borrower will receive $97,000. He or she will have to pay back the amount in loan proceeds plus the interest rates.

Similarly, a borrower may apply for $20,000 in student loans. After the loan processing is complete, the borrower may receive only a total of $18,000 – the net proceeds available after all the overhead charges are paid off.

Calculating loan proceeds can follow the example below:

Step 1: A personal loan of $50,000 is approved for Person A.

Step 2: The lender has the following costs associated with the loan

  • Origination fee 1%
  • Underwriting fee 1%
  • Broker fee 2%
  • Total fees = 4%

Step 3: Amount of loan payable in costs = 4% of $50,000

                                                                         = $2,000.

Step 4: Amount of loan payable in loan proceeds = $50,000 – $2,000

                                                                                         = $48,000.

Summary

Loan proceeds are the net amount of a loan payable to the borrower. They may be made directly available for the borrower or could be sent to a third party to be kept in escrow and to be disbursed at regular intervals. Borrowers should go through the terms and conditions of the loan to get a better understanding of how much loan they will actually receive.

Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

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