A loan is being repaid with 20 annual payments of $180 each. At the time of the
ID: 2775313 • Letter: A
Question
A loan is being repaid with 20 annual payments of $180 each. At the time of the 5th payment, the borrower is allowed to pay an extra $300 and to repay the remaining outstanding balance over the next 11 years with revised level annual payments. If the effective interest rate is 4%, how much interest did the borrower save by making the additional payment and shortening the loan? (Note; this is the total dollar amount of interest saved; not the present value or accumulated value of the interest saved.) (Answer: $263.80)
Explanation / Answer
No. of instalment 20 Amount $3,600 Amount = Principal + Interest 3600 = P + (P x R x T /100) 3600 = P+ (P x 4 x 20/100) 3600 = 9P / 5 18000 = 9 P 2000 = P Principal $2,000 Interest Rate 4% Period 20 Year Beginning Balance Total Payment Interest Payment Principal Payment Ending Payment 1 $2,000 $180.00 $80.00 $100.00 $1,900.00 2 $1,900 $180.00 $76.00 $104.00 $1,796.00 3 $1,796 $180.00 $71.84 $108.16 $1,687.84 4 $1,688 $180.00 $67.51 $112.49 $1,575.35 5 $1,575 $180.00 $63.01 $116.99 $1,458.37 6 $1,458 $180.00 $58.33 $121.67 $1,336.70 7 $1,337 $180.00 $53.47 $126.53 $1,210.17 8 $1,210 $180.00 $48.41 $131.59 $1,078.58 9 $1,079 $180.00 $43.14 $136.86 $941.72 10 $942 $180.00 $37.67 $142.33 $799.39 11 $799 $180.00 $31.98 $148.02 $651.36 12 $651 $180.00 $26.05 $153.95 $497.42 13 $497 $180.00 $19.90 $160.10 $337.32 14 $337 $180.00 $13.49 $166.51 $170.81 15 $171 $180.00 $6.83 $173.17 -$2.36 16 -$2 $180.00 -$0.09 $180.09 -$182.45 17 -$182 $180.00 -$7.30 $187.30 -$369.75 18 -$370 $180.00 -$14.79 $194.79 -$564.54 19 -$565 $180.00 -$22.58 $202.58 -$767.12 20 -$767 $180.00 -$30.68 $210.68 -$977.81 Borrower save interest $263.82
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