Balance
Definition
The term “balance” refers to the amount left over after subtracting relevant values. In financial contexts, this could mean the remaining debt on a loan (principal balance) or the total amount of funds available in an account after all subtractions have been made.
Examples
-
Loan Balance:
- If a homeowner took out a mortgage loan of $150,000 and has been making regular payments, the current balance might be reduced to $95,000. This amount ($95,000) represents the remaining principal that still needs to be paid back to the lender.
-
Account Balance:
- Suppose a depositor has a savings account with an initial deposit of $20,000. Over time, with added interest and some withdrawals, the account balance may stand at $25,000. This amount includes the initial deposit plus any interest earned, minus any withdrawals made by the account holder.
Frequently Asked Questions
Q: What is a principal balance? A: The principal balance is the remaining amount of the original loan amount after any repayments have been made, excluding interest. It is the actual amount that needs to be repaid.
Q: How is account balance different from available balance? A: The account balance is the total actual balance in an account, while the available balance includes pending transactions. Thus, available balance can be less than the account balance if there are pending debits.
Q: Can balances be negative? A: Yes, negative balances can occur in debts (overdrawn accounts or overdue loans) where the money owed exceeds deposits or credits.
Related Terms
-
Available Balance:
- The available balance is the amount of money in an account that is available for use, taking pending transactions into consideration.
-
Outstanding Balance:
- Refers to the total amount of existing debt or money owed in an account, including interest, fees, and principal.
-
Principal:
- The original amount borrowed on a loan, or the amount invested in an account, excluding interest and other charges.
Online Resources
- Federal Reserve Board: Consumer Resources
- MyMoney.gov: Managing Debt
- Investopedia: Loan Payment
References
- Federal Reserve Board. “Consumer Resources.” Federal Reserve System.
- MyMoney.gov. “Managing Debt.” U.S. Financial Literacy and Education Commission.
- Investopedia. “Loan Payment.” Dotdash Media, Inc.
Suggested Books for Further Studies
- “Personal Finance for Dummies” by Eric Tyson
- “Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!” by Robert T. Kiyosaki
- “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy” by Thomas J. Stanley and William D. Danko
Real Estate Basics: Balance Fundamentals Quiz
### What does the term "balance" typically refer to in a financial context?
- [x] The amount left over after subtracting relevant values
- [ ] The initial amount borrowed or invested
- [ ] The total interest earned on an account
- [ ] None of the above
> **Explanation:** In financial contexts, balance is the remaining amount after relevant subtractions, such as loan repayments or account withdrawals.
### What is a loan balance?
- [ ] The initial loan amount plus interest
- [x] The remaining unpaid amount on a loan
- [ ] The total amount of interest paid
- [ ] The sum of the monthly payments made
> **Explanation:** A loan balance is the remaining unpaid principal amount on a loan that must be repaid.
### Can an account balance be negative?
- [x] Yes
- [ ] No
- [ ] Only in savings accounts
- [ ] Only in checking accounts
> **Explanation:** An account balance can be negative, such as when an account is overdrawn or a loan is overdue.
### What is the difference between an account balance and available balance?
- [ ] They are the same
- [x] Account balance is the total amount; available balance includes pending transactions
- [ ] Available balance is more than account balance
- [ ] Account balance is less than the principal balance
> **Explanation:** The account balance is the total actual balance, whereas the available balance includes pending transactions and may be less than the account balance.
### For what type of financial activity is the term "outstanding balance" used?
- [ ] Only for savings accounts
- [x] Both for loans and credit card debts
- [ ] Only for investments
- [ ] Only for mortgages
> **Explanation:** The outstanding balance refers to the total amount of existing debt, which can be applied to loans or credit cards.
### Which of the following is not impacted by principal balance?
- [ ] Loan repayments
- [x] Checking account overdrafts
- [ ] Mortgage payoffs
- [ ] Debt consolidation plans
> **Explanation:** The principal balance directly impacts loan repayments, mortgage payoffs, and debt consolidation plans, but not checking account overdrafts.
### How often do savings account balances typically earn interest?
- [x] Monthly or annually
- [ ] Daily
- [ ] Hourly
- [ ] Once at the end of the term
> **Explanation:** Savings account balances typically earn interest monthly or annually, though different financial institutions may have varying policies.
### What necessitates recalculating the loan balance?
- [ ] Interest changes
- [ ] Monthly payments
- [x] Both interest changes and monthly payments
- [ ] Initial loan amount adjustment
> **Explanation:** Both interest rate changes and monthly payments impact the recalculation of a loan balance.
### Which balance can be checked to know immediate spending power in a bank account?
- [ ] Principal balance
- [x] Available balance
- [ ] Outstanding balance
- [ ] Loan balance
> **Explanation:** The available balance indicates immediate spending power, considering pending transactions.
### What happens if the principal balance of a loan decreases?
- [x] Interest payments reduce
- [ ] Interest payments increase
- [ ] Available balance increases
- [ ] Outstanding balance increases
> **Explanation:** As the principal balance decreases, the interest payments reduce, reducing the total amount owed.
