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Terms
• installment
loan
• level payment
plan
• amortization
table
• down payment
• amount
fi nanced
• early
repayment
Section 8.2 Installment Loans
Objectives
• Describe installment loans.
• Defi ne down payment.
• Calculate an early loan repayment amount.
Build Your Math Skills
Review these math skills to prepare for the lesson that follows.
1. Convert percentages to decimals by moving the decimal two places to
the left. Example: 12% → 0.12
A. 13% → B. 1.5% →
C. 8.35% → D. 9.2% →
2. Multiply decimals. Round to the nearest cent ($0.01) if necessary. Example:
$1,155 × 0.07 = $80.85
A. $164 × 0.04 = B. $608.94 × 0.25 =
C. $217.46 × 0.025 = D. $665.37 × 1.07 =
3. Add and subtract decimals. Example: $945.74 – $85.71 = $860.03
A. $87.45 + $7.41 = B. $145.96 + $107.04 =
C. $560.42 – $78.83 = D. $770.04 – $207.16 =
Installment Loans
Most loans are not single-payment loans. A more common way to repay a
loan is in periodic payments, usually monthly. In an installment loan, payments
are made at predetermined intervals. Each payment includes the interest accrued
since the last payment and a portion of the principal. For example, suppose you
borrow $1,000 and plan to pay it back in 12 monthly installments. The term of
the loan would be 12 months because the loan is not fully repaid until the fi nal
payment is made.
Typically, installment loans are level payment plans. Level payment plans
are designed to have the same payment amount in each installment. With each
payment, a portion of the payment covers interest due for the most recent
period. The remainder of the payment reduces the principal.
Figure 8-2 shows a table of payments, called an amortization table, for a
$1,000 installment loan using an interest rate of 9%. An amortization table is a
schedule that shows the amount of interest and principal for each payment so
that a loan can be repaid within a specifi c period of time.