Chapter 8 Loans
276
Strategy
Use the formula:
interest payment =
annual interest rate × principal balance
number of payments per year
Solution
Step 1: Determine the monthly interest rate. Divide the annual interest rate by
12 (the number of payments per year).
monthly interest rate =
annual interest rate
number of payments per year
monthly interest rate =
9%
12
Step 2: Convert the fraction to a decimal. Divide the numerator by the
denominator.
monthly interest rate = 9% ÷ 12 = 0.75%
Step 3: Convert the monthly interest rate to a decimal by moving the decimal
two places to the left.
0.75% → 0.0075
Step 4: Determine Carla’s interest payment for the fi rst month. Multiply the
monthly interest rate by the principal balance.
interest payment = monthly interest rate × principal balance
interest payment = 0.0075 × $2,000
interest payment = $15
Step 5: Determine the amount of the monthly payment that will be applied to
the principal. Subtract the interest payment from the monthly payment amount.
principal payment = monthly payment amount – interest payment
principal payment = $349.80 – $15
principal payment = $334.80
Check It
After Carla makes her fi rst monthly payment, her principal balance is
reduced by $334.80 to $1,665.20. Use this new principal balance to determine
how much of Carla’s second monthly payment is an interest payment and how
much of Carla’s second monthly payment is applied to the principal balance.
Round to the nearest cent ($0.01) if necessary.
Down Payment
An installment loan is often used to fi nance the purchase of an asset. The
asset could be a house, a car, or a piece of equipment. The asset could even be a
fyi
The steps used in
the See It portion of
Example 8-2A can
be used to create an
amortization table.