Page 87 - CalcBus_Flipbook

CH 10] Calculating Business 10-9

amount. If the payment is insufficient to pay all the interest due then that portion of unpaid
interest is added to the balance of the loan. Caution here, lenders expect borrowers to make
the minimum payments as agreed as the lender will report the short fall as a mark against
the borrowers credit.
In Figure 10.2 a loan for $4,500.00 was made at 8% interest, to be paid for over 4 years
with (4 x 12 =) 48 monthly payments in the amount of $109.86 each. On this loan it is
calculated that the borrower will pay a total of $773.19 in interest and when added to the 10
principal amount is liable for a total of ($4,500.00 + $773.19 =) $5,273.19.
Examining Figure 10.2 and looking at the dollars paid towards interest you will note
that those values decrease with each payment. The interest payment begins at $30.00 with
Payment No. 1, and drops to $20.45 with payment number 18. By contrast, the dollars paid
with each payment towards the principal balance increases in amount. Beginning with the
first payment the amount paid toward principal on the loan is $79.86 and with payment
number 18, this principal amount has increased to $89.41.
Ending Balance: With Payment No. 1 the Total Payment is $109.86; the interest charge
is $30.00 and the amount reducing principal is $79.86. When the $79.86 principal payment
is deducted from the beginning loan value of $4,500.00 the Ending Balance is ($4,500.00 -
$79.86 =) $4,420.14. The next months’ payment structure is based on this ending balance
which declines over time as payments are made.
Looking at the 18 payment, the Beginning Balance is $3,067.50, the monthly payment
th
remains unchanged at $109.86. Again, the amount of the payment that goes toward interest
charges has dropped to $20.45, which is paid first and the amount of the payment paid to
reduce the principal has increased to $89.41, leaving a balance of $2,978.09. The

Figure 10.2 Monthly payments for interest and balance.
This example was created on an Excel ® worksheet which is a part of the Microsoft Office suit
and is an excellent tool for constructing such analytical statements for business considerations.

Copyrighted Material