Guide to loan proceeds - Everything you need to know

Loan proceeds are the amount of money you actually need to make a purchase. It is closely related to the principal, which is the total amount you borrow. In this post, we'll take a closer look at the difference between loan proceeds and principal and what it means for your loan. 

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What does loan proceeds mean?

The word proceeds means yield or income. However, it has a slightly different meaning when it comes to loans. Here, loan proceeds are the amount of money you need to buy a house, for example. 

If you need to borrow one million euro, your loan proceeds are one million euro. In other words, the loan proceeds are only the exact amount of the loan you need to make the purchase. However, there are other expenses that come on top of the loan proceeds. 

Are you about to borrow money? Then consider alternative financing options through Fundbricks, such as crowdlending .

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What does principal mean?

While the loan proceeds are the amount you have to borrow, the principal is the total amount you actually end up borrowing. This is because the loan proceeds are just the amount you need, while the principal also includes other necessary expenses. The principal will therefore always be a higher amount than the loan proceeds. 

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What is the principal amount of the loan?

The principal is made up of formation expenses and the proceeds of the loan. 

If your loan proceeds are €1 million and €10,000 in set-up costs are added, the principal of the loan is €1,010,000. Set-up costs may vary depending on the lender you choose. 

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How does the principal of the loan affect my finances?

The principal is the total amount you have to borrow. But the principal also affects the cost of the loan. Depending on how your loan is structured, the principal will therefore affect your finances in different ways.

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1. The term you have agreed with the lender determines how long you have to pay off the principal. The longer the term, the more monthly payments. 

2. Your monthly payments to repay the loan depend on the size of the principal. If you have a large principal amount with a short maturity, you will have to pay back a large part of it every month. 

3. The principal amount also affects the interest rate you pay. If the amount of the principal is high, the interest and fees will also be correspondingly higher. Remember that the principal amount does not change, but it affects the costs you incur for the loan. 

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As your expenses depend on the size of the principal, it may be advantageous to pay as much of the purchase price as possible. The more you are able to put down, the smaller the principal - the amount you need to borrow. This ultimately means you save money on the loan. 

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What you should be aware of if you need to borrow money

If you need to borrow money for a home, there are several things to keep in mind. We will summarize them here. 

• The loan proceeds - the amount you need to borrow - are not the same as the principal. The principal also includes the cost of setting up the loan.
• The more you can pay yourself, the less you need to borrow. This means that your principal and the costs associated with the principal will be smaller.
• Borrow only what you need. Borrowing more will increase the principal and thus your borrowing costs. 
• If you need a loan to buy a home, you will often take out a mortgage loan. In this case, you should be aware that the principal of the loan will consist of the loan proceeds, the set-up costs and a capital loss, which depends on the price of the mortgage loan. 

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It is advisable to get quotes from several different lenders so that you can get the most advantageous loan and structure your finances in the best possible way.

Now that you've got a handle on loan proceeds, read our post on guarantor loans to learn more about the concept.