Question

Without the use of excel:

A borrows 20000 for 8 years and repays the loan with level annual payments at the end of each year.

B also borrows 20000 for 8 years, but pays only interest as it is due each year and plans to repay the entire loan at the end of the 8 year period.

Both loans carry an effective rate of 8.5%. How much more interest will B pay than A pays over the life of the loan?

Answer 1

Borrower A Amount of loan = $20.000 Term = 8 Years Interest rate = 8.5% Annual payment = Amount of loan * 1/[1-(1+)-n] = $20,000 * 8.5%/[1-(1 + 8.5%)^-8] = $1,700 / 0.479330552 = $3,546.613067 = $3,546.613 (Rounded) Total amount paid = $3,546.613 Per annum * 8 Years = $28.372.904 Total interest amount paid by borrower A = Total amount paid - Amount of loan = $28,372.904 - $20,000 = $8,372.904 Borrower B Amount of loan = $20,000 Term = 8 Years Interest rate = 8.5% Here we are paying only interest amount per annum and there is no principal amount yearly and pay total loan amount at the end of term. Annual interest amount = Amount of loan * Interest rate = $20,000 * 8.5% = $1,700 Total interest paid = $1,700 Per annum * 8 Years = $13,600 Ans:More interest amount paid by borrower B = $13,600 - $8,372.904 = $5,227.096