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Unformatted text preview: Loan Payments, Credit Cards and Mortgages Monday February 7, 2011 (continued) Loan Basics Installment Loans An Installment Loan is a loan that is paid off in equal monthly payments. In an installment loan, as time goes on, the portion of each payment that goes toward pay- ing down the borrowed amount increases while the portion that goes toward paying interest decreases. Loan Payment Formula (Installment Loans) PMT = P APR n 1- 1 + APR n- nY P = amount borrowed APR = annual percentage rate (as a decimal) n = number of payment periods Y = loan term in years Example 1. You borrow $1200 at annual interest rate 12% for 6 months. You plan to make 6 equal montthly payments to pay off the loan. (a) Compute the monthly payment amount. Solution Use the loan payment formula for an installment loan with P = $1200 APR = 0 . 12 n = 12 Y = 1 2 1 2 PMT = $1200 . 12 12 1- 1 + . 12 12- 12 1 2 = $207 . 06 (b) For each payment, find the amount of money that pays down the borrowed amount and the the amount of money that pays interest.amount and the the amount of money that pays interest....
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