Chapter 8 Loans
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Step 2: Determine the amount of the down payment. Multiply the purchase
price by the down payment rate.
down payment = purchase price × down payment rate
down payment = $14,995 × 0.15
down payment = $2,249.25
Step 3: Determine the amount that Mali will fi nance. Subtract the down
payment from the purchase price.
amount fi nanced = purchase price – down payment
amount fi nanced = $14,995 – $2,249.95
amount fi nanced = $12,745.75
Check It
Riley and Marie want to purchase a lake house for $243,500. The bank is
requiring a down payment of 20%. Determine both the down payment and the
amount that Riley and Marie will be fi nancing.
Early Loan Repayment
Many loans allow for early repayment. Early repayment means that the
borrower pays off the installment loan sooner than the original term. This can
be done in two ways. One way involves the borrower making more than the
planned payment each month. Because a normal level payment plan pays all
the interest due fi rst and the rest is applied to principal, paying more than the
planned level payment reduces the principal even more. Therefore, the loan will
be paid off early.
Early repayment can also be made by making a single payment that will pay
off the remaining balance. To pay off an installment loan early, you must pay the
remaining principal and any interest due. An early payoff quote usually must be
obtained from the lender. However, you can estimate the amount of the early
payoff using the following formulas:
monthly interest rate =
annual interest rate
number of payments per year
interest due = monthly interest rate × principal balance
early payoff amount = principal balance + interest due
fyi
Some lenders charge a
penalty if a loan is paid
off early. The prepayment
penalty is usually based
on a percentage of the
remaining balance or
a certain number of
months’ worth of interest.
Recent legislation has
sought to limit lenders’
ability to charge early
repayment penalties.