Non amortizing vs. amortizing loan

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MissCleo

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So I could have sworn Schweser said for all intents and purposes non amortizing loans were credit cards, and auto loans since no one ever prepays an auto loan. However on the test I just took they classify auto loans as amortizing. What are examples of non - amortizing loans? While technically you can pay principal on auto loans, no one does so shouldn’t it be considered a non amortizing loan like they said in the text? which answer is right come test day?
 
The difference between an amortizing loan and a non amortizing loan has nothing to do with the ability to prepay. Each payment of an amortizing loan will have both a principal and interest portion, so the outstanding balance will decline with each payment. An example of a non amortizing loan would be an interest only mortgage, where only interest is paid until the maturity of the mortgage and then the full principal balance is expected to be paid.
A prepayment option and an amortizing loan are two seperate things. You can have a prepayment option on a non amortizing loan or you could be prohibited from prepaying an amortizing loan.
 
1logic you’re completely missing the point. I know that a prepayment and amortizing loan are two seperate things. I was just curious what other examples were besides IOs and CC receivables, and if someone could explain the discrepancy in Schewser. While of course you can pay principal on auto loans no one does, so Schweser had it classified as non amortizing. Then on the exam they had it as amortizing.
 
1logic is right, they’re not missing the point at all.
Schweser didn’t say that no one makes principal payments on auto loans – they have to, as they signed an amortizing loan when they bought the car.
What people don’t do, is pay EXTRA principal on top of what’s required in their contracts – ie, they don’t make prepayments.
 
they classifed auto loans as non amortizing in the text, I just want to know if this is incorrect, if so I will write schweser after the test is done
 
Auto loans are amortizing, and what the hell kind of text says people don’t make prepayments on auto loans? Of course they do.
Balloon mortgages are non-amortizing.
Anything that lets you hold a balance without paying off the principal is non-amortizing, so credit cards are the most obvious example. Any other line of credit works, like a HELOC.
 
aaronhotchner wrote:
Balloon mortgages are non-amortizing.
Click to expand...
I think most Balloon mortgages have an amortizing portion, and the rest is due at maturity. So they would still amortize unless the Balloon portion was the entire UPB and then it would just be an I/O mortgage.
 
Balloon mortgages are not fully amortizing.*
If we’re not allowing any amortization, credit cards are amortizing because new US credit laws do not allow a minimum payment that will not contribute toward principal.
 
I Agree with 1logic that credit card loans are non-amortizing as the prepayments will add on making them revolving ones…..this is how I remember I need to check though
 
aaronhotchner wrote:
Balloon mortgages are not fully amortizing.*
If we’re not allowing any amortization, credit cards are amortizing because new US credit laws do not allow a minimum payment that will not contribute toward principal.
Click to expand...
Yea, I think we’re on the same page. And credit cards are slightly amortizing. I think its just so the principal portion is so small and easy to reinvest that they can be packaged into non amortizing CDO’s fairly easily.
 
I think amortizing has got to do with the way the product is structured (ie how payments from borrowers are assigned to principal and interest). Auto loans are definitely amortizing as some portion of payment is applied towards principal every month and eventually at maturity of loan period the loan is fully paid.
Credit card loans is non-amortizing because there isn’t a schedule calculated according to which payments will payoff the principal. Instead when the ABS is created, principal paid is not forwarded to the owners (till lockin period) , hence it is non-amortizing.
I am not sure if I read the stuff properly on auto loans, but I dont recollect Schweser saying that auto loans are Non amortizing? Could you please tell me the chapter and page number.
 
I think amortizing has got to do with the way the product is structured (ie how payments from borrowers are assigned to principal and interest). Auto loans are definitely amortizing as some portion of payment is applied towards principal every month and eventually at maturity of loan period the loan is fully paid.
Credit card loans is non-amortizing because there isn’t a schedule calculated according to which payments will payoff the principal. Instead when the ABS is created, principal paid is not forwarded to the owners (till lockin period) , hence it is non-amortizing.
I am not sure if I read the stuff properly on auto loans, but I dont recollect Schweser saying that auto loans are Non amortizing? Could you please tell me the chapter and page number.
 
Auto Loans are always amortizing - credit cards are non-amortizing. In reference to the statement above, recent legislation has required that the min due construct change to allow a card holder to pay down part of their balance every month. However, the CFA text on ABS makes no mention of the new legislation, and so it shouldnt be required on the exam. That’s not to say they couldnt ask a question on it. Prior to the legislation, the min due construct varied by card issuer.
Prepayments exist on auto loans due to trade-ins, etc. The question that CFAI text brings up is does prepayment risk actually exist (ie should you use zspread or OAS for discounting purposes) - their point is that the *characteristic* of auto loans is that the option to prepay is there, but its not taken advantage of.
The point is that for auto loans zspread and OAS should be the same. The call option exists, but since it tends not to be exercised there is no value to the call option held by the borrower
 
kwalew wrote:
Auto Loans are always amortizing - credit cards are non-amortizing. In reference to the statement above, recent legislation has required that the min due construct change to allow a card holder to pay down part of their balance every month. However, the CFA text on ABS makes no mention of the new legislation, and so it shouldnt be required on the exam. That’s not to say they couldnt ask a question on it. Prior to the legislation, the min due construct varied by card issuer.
Prepayments exist on auto loans due to trade-ins, etc. The question that CFAI text brings up is does prepayment risk actually exist (ie should you use zspread or OAS for discounting purposes) - their point is that the *characteristic* of auto loans is that the option to prepay is there, but its not taken advantage of.
The point is that for auto loans zspread and OAS should be the same. The call option exists, but since it tends not to be exercised there is no value to the call option held by the borrower
Click to expand...
The idea is that auto loan prepayments exist, but they generally aren’t related to movements in interest rates. Basically people don’t refinance their car loan when interest rates drop, so prepayment speeds should remain relatively constant across all movements in rates.
 
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