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

2. 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.

3. Formula 1
Interest = Principal × Rate × Time

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

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

6. 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?

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

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

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

10. Example 2
Kim Bianco obtained a loan of $6,000 at 8 percent for 36 months. The monthly payment is $ The balance of the loan after 20 payments is $2,
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?

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

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

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

14. 295: 1-17