A loan is an arrangement in which a lender provides money for the borrower's present use, and the borrower promises to repay the amount in the future, usually at an agreed rate of interest. The lender and borrower both sign a loan contract, which details the terms of the agreement.
The face value of a loan refers to the amount of principal that a borrower has to repay the lender, which is also the amount of money that the interest payment calculation is based upon. It is the original amount of the loan as detailed in the loan contract, which excludes all interest payments and fees.
Simple Interest Loans
For a simple-interest loan, determining the face value and interest payment is straightforward. If you borrow $10,000 at 12 percent for one year, you would receive the full face value of $10,000 at the start of the loan, and pay $1,200 in interest.
Discount Interest Loans
In some cases, the face value of a loan is not necessarily the amount of money you receive when you sign a loan contract. With a discount-interest loan, you would have the first interest payment deducted from the principal before you receive the money. If you borrow $10,000 with a discount interest loan at 12 percent interest, you will pay $1,200 before receiving the $10,000. In other words, your face value as stated on the loan contract will be $10,000, but you will only receive $8,800 at the outset of the loan.
An installment loan is when you make equal repayments during the loan period to pay back the principal and interest. Lenders often use add-on interest for this type of loan, which means that interest is calculated and then added to the amount you borrow to find the face value of the loan. With a $10,000 installment loan, your loan contract will state a face value of $11,200, but you will only get $10,000 after the signing.