Question

8. Calculating an installment loan payment using simple interest Calculating the Loan Payment on a Simple-Interest Installment Loan Instaliment loans allow borrowers to repay the loan with periodic payments over time. They are more common than single-payment loans because it is easier for most people to pay a fixed amount periodically (usually monthly) than budget for paying one big amount in the future. Interest on installment loans may be computed using the simple interest method or the add-on method. For an installment loan using simple interest and equal payments throughout the life of the loan, a portion of each repayment is dedicated to the principal and a portion to the interest. Remember that interest is charged only on the outstanding balance. This means that as each payment is made, more of it is allocated to The following table lists the monthly installment payment amounts required to repay $1,000 over various time frames and at various fixed-interest rates. The payment is the same each month, and the allocation between principal and interest is always Monthly Installment Loan Payments to Repay a $1,000, Simple Interest Loan Number of Monthly Payments Rate of Interest 36 60 48 $23.03 $23.49 72 84 12 $85.61 $86.07 $86.53 24 $43.87 $30.42 $44.77 $30.88 $23.95 19.80$17.05 $15.09 $20.28 $17.53 $15.59 86, $45.23 $31.34 $24.41 $87.45 $45.68 $31.80 $24.88 $20.76 $18.03 $16.09 $87,92 $46.14 $2.27 $25.36 $21.25 $18.53 $16.60 10 $46.61 $32.74 $25.85 $21.74 $19.03 17,12 $26.33 $22.24 $19.55 $17.65 $88.38 12 13 $88.85 $47.07 $33.2 $89.32 $20 $21.14 $89.79 $48.01 $23.27 $19.27

Answer 1

For an installment loan using simple interest and equal payments throughout the life of loan, a portion of each loan is dedicated to the principal and a portion to the interest. Remember that interest is charged only on the outstanding balance. This means that each payment is made, more of it is allocated to principal.

The following table lists the monthly installment payment amount required to repay $1,000 over various time frames and at various fixed-interest rates. The payment is the same each month, and the allocation between principal and interest is always different.  

Step: 1

Divide the amount of the loan by 1,000. Dividing $ 31,000 (loan amount) by 1,000 gives you a value of 31.

$ 31,000/$ 1,000 = 31

Step 2:

Use the rate of interest and the number of monthly payment to identify the appropriate figure to use from the table. In this case, the rate of interest is 18 %, and the loan requires 36 monthly payments. Therefore, the relevant amount from the table is $ 36.15

Step 3:

Multiply your answer in step 1 by the appropriate value from the table cell (from step 2). This gives you a required monthly payment amount of $ 1,120.65

31 x $ 36.15 = $ 1,120.65

Total Payments = No. of payments x EMI = 36 x $ 1,120.65 = $ 40,343.40

Loan amount = $ 31,000

Finance charge = Total Payments - Loan amount = $ 40,343.40 - $ 31,000 = 9,343.40