# What is a Loan Constant?

*Loan Constant is a financial term, somewhat related to Cap Rates and Cash on Cash, in that it indicates on a percentage basis the cash return to the lender relative to the outstanding loan balance.* Constant basically tells us how much principle and interest is being paid back to the lender divided by the loan amount.

Let's take a look at the formula and I'll run through a couple examples.

Loan Constant or K, as it's abbreviated, is simply the annual debt service divided by the loan balance. Imagine we have a $1,000,000 loan at, say, 6% per year amortized over 30 years. In this case, our annual debt service would be approximately $72,000 a year. Divided by a million dollars, that comes to a constant of 7.2%.

If that same loan were amortized over just 25 years, our annual debt service would be about $77,000 or a 7.7% constant. Of course, if the interest rate went up to, say, 7% over 25 years, then our debt service would be in the $84,000 range or an 8.4% constant.

Lender's return, cash-on-cash return to the lender, changes depending on the terms of the loan that is written. Lenders that want to recoup cash more quickly can charge 100% interest rate or shorten their amortization in order to do so.

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