Question

4. (a) Define an amortized loan and give two common examples. (b) If you take a 5-year $20,000 loan to finance a car purchase at 6% annual interest rate, what would be the monthly payment on this loan?

Answer 1

a. It is an installment loan in which the monthly payments are applied first towards reducing the interest balance, and any remaining sum towards the principal balance. As the loan is paid off, a progressively larger portion of the payments goes toward principal and a progressively smaller portion towards the interest. Eg:

Car loans,

Mortgages

b. EMI = principal amount + interest paid

interest rate/no. of payments * principal = interest

Balance, Monthly Repayments
Months	Principal	Interest	Balance	EMI
1	286.66	100	19713.34	386.66
2	288.09	98.57	19425.25	386.66
3	289.53	97.13	19135.72	386.66
4	290.98	95.68	18844.75	386.66
5	292.43	94.22	18552.32	386.65
6	293.89	92.76	18258.42	386.65
7	295.36	91.29	17963.06	386.65
8	296.84	89.82	17666.22	386.66
9	298.32	88.33	17367.89	386.65
10	299.82	86.84	17068.07	386.66
11	301.32	85.34	16766.76	386.66
12	302.82	83.83	16463.94	386.65
13	304.34	82.32	16159.6	386.66
14	305.86	80.8	15853.74	386.66
15	307.39	79.27	15546.35	386.66
16	308.92	77.73	15237.43	386.65
17	310.47	76.19	14926.96	386.66
18	312.02	74.63	14614.94	386.65
19	313.58	73.07	14301.36	386.65
20	315.15	71.51	13986.21	386.66
21	316.72	69.93	13669.49	386.65
22	318.31	68.35	13351.18	386.66
23	319.9	66.76	13031.28	386.66
24	321.5	65.16	12709.78	386.66
25	323.11	63.55	12386.67	386.66
26	324.72	61.93	12061.95	386.65
27	326.35	60.31	11735.6	386.66
28	327.98	58.68	11407.62	386.66
29	329.62	57.04	11078	386.66
30	331.27	55.39	10746.74	386.66
31	332.92	53.73	10413.82	386.65
32	334.59	52.07	10079.23	386.66
33	336.26	50.4	9742.97	386.66
34	337.94	48.71	9405.03	386.65
35	339.63	47.03	9065.4	386.66
36	341.33	45.33	8724.07	386.66
37	343.04	43.62	8381.03	386.66
38	344.75	41.91	8036.28	386.66
39	346.47	40.18	7689.81	386.65
40	348.21	38.45	7341.6	386.66
41	349.95	36.71	6991.65	386.66
42	351.7	34.96	6639.95	386.66
43	353.46	33.2	6286.5	386.66
44	355.22	31.43	5931.27	386.65
45	357	29.66	5574.27	386.66
46	358.78	27.87	5215.49	386.65
47	360.58	26.08	4854.91	386.66
48	362.38	24.27	4492.53	386.65
49	364.19	22.46	4128.34	386.65
50	366.01	20.64	3762.32	386.65
51	367.84	18.81	3394.48	386.65
52	369.68	16.97	3024.79	386.65
53	371.53	15.12	2653.26	386.65
54	373.39	13.27	2279.87	386.66
55	375.26	11.4	1904.62	386.66
56	377.13	9.52	1527.48	386.65
57	379.02	7.64	1148.46	386.66
58	380.91	5.74	767.55	386.65
59	382.82	3.84	384.73	386.66
60	384.73	1.92	0	386.65