Homework SourseSuppose that under the Plan of Repayment one should pay off
Suppose that under the Plan of Repayment one should pay off the debt in a number of equal end-of-month installments(principal and interest). This is the customary way to pay off loans on automobiles, house mortgages, etc. A friend of yours has financed $20,000 on the purchase of a new automobile, and the annual interest rate is 12% (1% per month).
a. Monthly payments over a 36-month loan period will be how much?
b. How much interest and principal will be paid within three month of this loan?
Solution
(a) Monthly payment ($) = Loan amount / P/A(1%, 36) = 20,000 / 30.1075** = 664.29
(b) Loan amortization schedule for first 3 months is as follows. Note that
(i) Interest payment in month N = Beginning balance in month N x 0.01
(ii) Principal payment in month N = $664.29 - Interest payment in month N
**From P/A Factor table
| Month | Beginning balance ($) | Monthly Payment ($) | Interest Payment ($) | Principal Payment ($) | Ending Balance ($) |
| 1 | 20,000.00 | 664.29 | 200.00 | 464.29 | 19,335.71 |
| 2 | 19,335.71 | 664.29 | 193.36 | 470.93 | 18,671.42 |
| 3 | 18,671.42 | 664.29 | 186.71 | 477.58 | 18,007.13 |
| TOTAL | 580.07 | 1,412.80 |
