Question

# Suppose you borrow \$2,500 at 5% and you are going to make annual payments of \$800....

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?

#### Homework Answers

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]

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