With the principal amount remaining fixed and interest amount decreasing the

With the principal amount remaining fixed and

This preview shows page 176 - 181 out of 262 pages.

With the principal amount remaining fixed and interest amount decreasing, the annual installment amount decreases over the years. The advance made for the purchase of machinery is one of the suitable examples under this category, for the machinery does not demand much repairs in the initial years of loan payments enabling the farmer to repay a large amount of installments in the initial years. The diagrammatic representation of the repayment schedule is shown in Figure 25.
AEA 302 AGRICULTURAL FINANCE 400 Principal + Interest Principal Figure 25: Amortized Decreasing Repayment Plan 1 6 Year The arithmetic calculation of the plan is embodied in Table 18. Example: Loan amount N10, 000 Time period 6 Years Rate of interest 12% Table 18: Amortised Decreasing Repayment Plan Year Principal (N) Interest (N) Installment (N) Balance amount (N) 1 2 3 4 5 6 1,666.67 1, 666.67 1, 666.67 1, 666.67 1, 666.67 1, 666.67 1,200 999.99 799.99 600.00 399.99 199.99 2,866.67 2,666.66 2,466.66 2,266.67 2,066.66 1,866.67 8,333.33 6,666.67 5,000.00 3,333.33 1,666.67 - Total 10,000.00 4,199.96 14,199.96 - B. Amortised Even Repayment Plan This is called equated annual installment method. The annual installment over the entire loan period remains the same in this method. The principal portion of the installment increases continuously, while the interest part declines gradually. This
AEA 302 MODULE 5 401 method is mostly adopted for term loans. Loans granted for farm development, digging of wash bowls or bore holes, dairy, poultry, etc., are the examples. This is depicted diagrammatically in Figure 26. Principal + Interest Principal Interest Figure 26: Amortized Even Repayment Plan 1 6 Year The annual installment is arrived at through the formula given below: n i i B I ) 1 ( 1 Where, I = Annual installment in N B = Principal amount borrowed in N n = Loan period in years i = Annual interest rate in fraction The plan is shown in Table 6.8 Example: Loan amou n t N10, 000 Time period 6 years Rate of interest 12% n i i B I ) 1 ( 1
AEA 302 AGRICULTURAL FINANCE 402 6 ) 12 . 0 1 ( 1 12 . 0 000 , 10 6 ) 12 . 1 ( 1 1 12 . 0 000 , 10 = 10,000 x 0.243225 = N2, 432.25 Table 19: Amortised Even Repayment Plan Year Installment (N) Principal (N) Interest (N) Balance amount (N) 1 2 3 4 5 6 2,432.25 2,432.25 2,432.25 2,432.25 2,432.25 2,432.25 1,232.25 1,380.12 1,545.73 1,731.22 1,938.97 2,171.64 1,200.00 1,052.13 886.52 701.03 43.28 260.61 8,767.75 7,387.63 5,841.90 4,110.68 2,171.71 - Total 10,000.00 9,999.93 4,593.57 3.3.4 Variable Repayment Plan As the very name indicates, various levels of installments are paid by the borrower over the loan period. In times of good harvest a higher installment is paid, while in periods of low yield lesser amount is credited towards installment to the lender. According to the convenience, the borrower effects the repayment. This method is not found with institutional borrowings. 3.3.5 Optimal Repayment Plan In this method provision is made for the borrower to make payment towards the principal amount in addition to the regular interest annually. 3.3.6 Reserve Repayment Plan or Future Payments This type of repayment is made by the borrowers in areas which are subject to high income variability of farms. The impending problem here is that the farmers are haunted by the fear that they may not be able to keep up their promise of repaying crop loans or installments towards
AEA 302

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• Fall '18
• Dr. N. E. Mundi
• Agricultural Finance