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Installment Loans ― Allocation of Monthly Payment

SECTION. 8-4. pp. 294-296. Installment Loans ― Allocation of Monthly Payment. Work out: payment to interest payment to principal new balance. Section Objective. Key Words to Know. repayment schedule (p. 294)

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Installment Loans ― Allocation of Monthly Payment

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  1. SECTION 8-4 pp. 294-296 Installment Loans― Allocation of Monthly Payment

  2. Work out: • payment to interest • payment to principal • new balance Section Objective

  3. Key Words to Know repayment schedule (p. 294) A schedule showing the distribution of interest and principal payments on a loan over the life of the loan.

  4. Formula 1 Interest = Principal × Rate × Time

  5. Formula 2 Payment to Principal = Monthly Payment – Interest

  6. Formula 3 New Principal = Previous Principal – Payment to Principal

  7. A Picture Perfect Loan p. 294 Why is it important to get a copy of your repayment schedule?

  8. Example 1 The Coles obtained the loan of $1,800 at 8 percent for 6 months shown in Figure 8.1 on page 294. Show the calculation for the first payment. What is the interest? What is the payment to principal? What is the new principal?

  9. Example 1 Answer: Step 1 Find the interest. Principal × Rate × Time $1,800.00 × 8% × 1/12 = $12.00

  10. Example 1 Answer: Step 2 Find the payment to principal. Monthly Payment – Interest $307.08 – $12.00 = $295.08

  11. Example 1 Answer: Step 3 Find the new principal. Previous Principal – Payment to Principal $1,800.00 – $295.08 = $1,504.92

  12. Example 2 Carol Blanco obtained a loan of $6,000 at 8 percent for 36 months. The monthly payment is $187.80. The balance of the loan after 20 payments is $2,849.08. What is the interest for the first payment? What is the interest for the 21st payment? Why is the interest so different for the two payments?

  13. Example 2 Answer: Step 1 Find the interest for the first payment. Principal × Rate × Time $6,000.00 × 8% × 1/12 = $40.00

  14. Example 2 Answer: Step 2 Find the interest for the 21st payment. Principal × Rate × Time $2,849.08 × 8% × 1/12 = $18.00

  15. Example 2 Answer The interest is much greater for the first payment the 21st payment because the principal is much greater.

  16. Practice 1 Cathleen Brooks obtained an 18-month loan for $3,200. The interest rate is 15 percent. Her monthly payment is $199.68. The balance of the loan after 6 payments is $2,341.45.

  17. Practice 1 (cont.) a. What is the interest for the first payment? b. What is the interest after the seventh payment? c. How much more goes toward the principal on the seventh payment compared to the first payment?

  18. Practice 1 Answer a. Interest for the first payment: $40.00 b. Interest after the seventh payment: $29.27 c. Amount more that goes toward the principal on the seventh payment compared to the first payment: $10.73

  19. Practice 2 Sam Billings obtained a personal loan for $1,500 at 12 percent for 12 months. The monthly payments on the loan are $133.20. Find the interest, payment to principal, and balance for the first three payments.

  20. Practice 2 (cont.) a. Interest on first payment? b. Payment to principal? c. New principal? d. Interest after second payment? e. Payment to principal?

  21. Practice 2 (cont.) f. New principal? g. Interest on third payment? h. Payment to principal? i. New principal?

  22. Practice 2 Answer a. Interest on first payment: $15.00 b. Payment to principal: $118.20 c. New principal: $1,381.80 d. Interest after second payment: $13.82 e. Payment to principal: $119.38

  23. Practice 2 Answer (cont.) f. New principal: $1,262.42 g. Interest on third payment: $12.62 h. Payment to principal: $120.58 i. New principal: $1,141.84

  24. END OF SECTION 8-4 Installment Loans― Allocation of Monthly Payments

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