SECTION 8-4 Installment Loans― pp

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Presentation transcript:

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

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.

Formula 1 Interest = Principal × Rate × Time

Formula 2 Payment to Principal = Monthly Payment – Interest

Formula 3 New Principal = Previous Principal – Payment to Principal

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?

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

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

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

Example 2 Kim Bianco 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?

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

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

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

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