Question

Suppose you borrow $2,500 at 5% and you are going to make annual payments of $800. How long is it before you pay off the loan?

Answer 1

• Principal balance of $ 2,500 is to be repaid.
• Working

Year	Beginning Balance	Interest	Payment made	Reduction in Principal amount	Ending Balance
	[A]	[B = A x 5%]	[C]	[D = C - B]	[E = A - D]
1	$2,500	$125	$800	$675	$1,825
2	$1,825	$91	$800	$709	$1,116
3	$1,116	$56	$800	$744	$372
4	$372	$19	$391	$372	$ 0

• Answer

It will take more than 3 years to pay off.

In Year 4, you’ll have to pay only $ 391 to settle your loan.

Hence, it would take around 4 years [since payments are made annual;y, last payment would be at year end]