Question

An industrial bank will loan you $20,500 for three years to buy miscellaneous equipment for your firm. The loan must be repaid in equal monthly payments. The annual interest rate on the loan is 8.5% of the unpaid balance. How large are the monthly payments?

Answer 1

Given,

Loan amount = $20500

Annual interest rate = 8.5% or 0.085

Number of years = 3 years

Solution :-

Monthly interest rate (r) = 0.085/12 = 0.00708333333

Number of months (n) = 3 years x 12 = 36

Now,

Monthly payment = (Loan amount x r) [1 - (1 + r)^-n]

= ($20500 x 0.00708333333) [1 - (1 + 0.00708333333)^-36]

= $145.208333265 [1 - (1.00708333333)^-36]

= $145.208333265 [1 - 0.77561337029952]

= $145.208333265 0.22438662970048 = $647.13