Question

totli on the loan. onent paid as well as the total interest paid Self Assessment Questions serc Explain the concept of loan amortization Exercise 3.6 You are a member of a credit union at your work place. You contractbe paid in ofGHe at the rate of 16%. If the loan together with the interest is to be five years in equal installments 2. paid in calculate how much should be paid each y ii) p repare a loan amortization schedule for the loan. CaDEUCC/Post-Diploma in Business Studies

Answer 1

When a loan requires the borrower to pay a fixed amount periodically towards interest first for a particular period before the payment towards principal amount, such loan is called "Loan Amortization". That means, the fixed amount, first pays off the interest and then pays off principal amount for a particular period.

For example, A borrows $10,000 from B with an interest rate of 10% per term. That means, $1,000 ($10,000*10/100) needs to be paid towards interest in first term. Suppose, if the fixed payment amount is decided at $1,500 per term then $1,000 will be towards interest for that term and $500 will get deducted from the total loan amount towards Principal amount resulting the loan balance at $9,500 ($10,000 - $500) at the beginning of the second term. At the end of the second term, the fixed payment amount pays off the interest of $950 ($9,500*10/100) and the balance of $550 ($1,500 - $950) towards the principal amount that resulting the total loan balance at $8,950 ($9,500 - $550) at the beginning of the third term and so on...

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