(a) PV 10,000, R 8%, N 5 computes to annual payments of 2,504.56.
(b) PV 10,000, FV 5,000, R 8%, PMT 2,504.56 computes to N of 2.7 yrs.
Note - Principal can't be paid in equal amounts when paying a loan in equal amounts, since interest is always deducted first, based on the unpaid balance.
Assuming principal is paid over 5 years equally,
Declining Balance Method, whereby interest is based on outstanding balance of loan,
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Year 1 : 10,000 - (10,000 / 5) - (0.08 * 10,000) = $7,200
Year 2 : 7,200 - (10,000 / 5) - (0.08 * 7,200) = $4,624
Flat Rate Method, whereby interest is based on principal borrowed,
End of
Year 1 : 10,000 - (10,000 / 5) - (0.08 * 10,000) = $7,200
Year 2 : 7,200 - (10,000 / 5) - (0.08 * 10,000) = $4,600
It will take 2 years to reduce the amount you owe to approximately $5,000.
Formula Used:
Balance = Principal - Principal Paid - Interest
DOUBLE U SOUBLE U
If you borrow $10,000 at 8% APR for 5 years with annual payments, how long will it take until you owe only $5,000?
