Question

In order to buy a new car, you got 65,000$ credit from your local bank. According to the loan agreement, you will payback this loan in 5 equal installments. If the bank charges 9% interest rate, what is the “principal paid” for the year 2?

Answer 1

First let us know the value of annual equal installments.

=> r*loan value / [1-(1+r)^(-n)]

=>(65,000*0.09) / [1-(1.09)^(-5)]

=>5,850 / [1-0.64993139]

=>5850/0.3500686

=>$16,711.01.

Now,

year	beginning loan balance	interest	installment	principal repaid (installment - interest)	ending loan balance
1	65,000	(65,000*9%)=>5,850	16,711.01	(16,711.01-5,850)=>10,861.01	(65,000-10,861.01)=>54,138.99
2	54,138.99	(54,138.99*9%)=>4,872.51	16,711.01	(16,711.01-4,872.51)=>11,838.50	(54,138.99-11,838.50)=>42,300.49.

So from above table it can be seen that principal repaid in year 2 =>$11,838.50.