Installment Loans. Lecture 6 Section Robb T. Koether. Hampden-Sydney College. Fri, Jan 26, 2018
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1 Installment Loans Lecture 6 Section 10.4 Robb T. Koether Hampden-Sydney College Fri, Jan 26, 2018 Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
2 1 Installment Loans 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
3 Outline 1 Installment Loans 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
4 Installment Loans Definition (Installment Loan) With an installment loan, the borrower pays back the loan through regular, equal payments (usually monthly). For each payment, The interest rate is applied to the outstanding balance at the end of the payment period. The interest is added to the outstanding balance. And the payment is subtracted from the outstanding balance, producing the new balance to be carried over to the next payment period. In order to pay the loan off, the payments must be greater than the interest earned between payments. The greater the difference, the faster the loan is paid off. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
5 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
6 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Installment loan Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
7 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Installment loan You have borrowed a large sum of money from the bank (your loan). Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
8 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Installment loan You have borrowed a large sum of money from the bank (your loan). You write monthly checks to the bank (your payments), paying down that amount. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
9 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Installment loan You have borrowed a large sum of money from the bank (your loan). You write monthly checks to the bank (your payments), paying down that amount. Annuity Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
10 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Installment loan You have borrowed a large sum of money from the bank (your loan). You write monthly checks to the bank (your payments), paying down that amount. Annuity The bank has borrowed a large sum of money from you (your savings account). Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
11 Installment Loans vs. Annuities Mathematically, this is exactly the same as drawing down an annuity. Installment loan You have borrowed a large sum of money from the bank (your loan). You write monthly checks to the bank (your payments), paying down that amount. Annuity The bank has borrowed a large sum of money from you (your savings account). The bank writes monthly checks to you (your withdrawals), paying down that amount. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
12 Installment Loans Therefore, the formula for the payment M for an installment loan is exactly the same as the annuity formula for drawing down: ( ) r/k M = P 1 ( 1 + r ) kt, k where P is the principal (amount borrowed), r is the annual interest rate, k is the number of payments per year, and t is the number of years. Payments are usually monthly (k = 12), but they do not need to be. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
13 Outline 1 Installment Loans 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
14 Example Example (Three-year loan) $4,550 is borrowed at 20% for 3 years, with payments made annually. Find the annual payment. Trace the balance over the three years as interest is applied and the payments are made. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
15 Example Example (Three-year loan) In this case, k = 1, so the payment is M = Pr 1 (1 + r) t Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
16 Example Example (Three-year loan) In this case, k = 1, so the payment is M = Pr 1 (1 + r) t = (4550)(.20) 1 (1.20) 3 Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
17 Example Example (Three-year loan) In this case, k = 1, so the payment is M = Pr 1 (1 + r) t = (4550)(.20) 1 (1.20) 3 = $2160. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
18 Example Example (Three-year loan) Starting Ending Year Balance Interest Total Payment Balance 1 4, ,460 2,160 3,300 Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
19 Example Example (Three-year loan) Starting Ending Year Balance Interest Total Payment Balance 1 4, ,460 2,160 3, , ,960 2,160 1,800 Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
20 Example Example (Three-year loan) Starting Ending Year Balance Interest Total Payment Balance 1 4, ,460 2,160 3, , ,960 2,160 1, , ,160 2,160 0 Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
21 Example Example (Financing a Car) You would like to purchase a new car priced at $25,000. You can put $5,000 down and finance the rest at 6% for 60 months. Find The monthly payment. The total amount paid. The total amount of interest paid. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
22 Example Example (Home Mortgage) You would like to purchase a home for $300,000. You can put $60,000 down and finance the rest at 3.7% for 30 years, at 3.0% for 15 years, or at 2.9% for 10 years. Find The monthly payment for each choice. The total amount paid for each choice. The total amount of interest paid for each choice. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
23 Outline 1 Installment Loans 2 Examples 3 Assignment Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
24 Assignment Assignment Chapter 10: 57, 58, 59, 61, 62, 63. Robb T. Koether (Hampden-Sydney College) Installment Loans Fri, Jan 26, / 14
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