1|Business and Consumer Loans General Mathematics

BUSINESS AND CONSUMERR LOANS
A 𝒍𝒐𝒂𝒏 is a debt provided by one entity (an
individual or an organization) to another entity at
an interest rate. Loans can be repaid through a
one-time payment or several payments. This
lesson involves the case wherein a loan is repaid
by making equal payments regularly.
AMORTIZATION
It is paying off a debt or loan in regular
installments over a specific period of time.
Amortization follows an amortization schedule
where the number of needed payments,
payment for each period, payment on principal
and interest, and balance of loan are reflected.
To compute for the periodic payment, we follow
the formula for periodic payment of annuities.
𝒊 value of a debt after a certain number of
𝑹 = 𝑨𝒏 [ ] periods and maturity value of the payments
𝟏 − (𝟏 + 𝒊)−𝒏
Where R = periodic payment
An = present value of the loan
𝒋
𝒊 = interest rate per period (𝒎)
n = number of payments made
t = time in years
Example:
1. Find the monthly amortization (i.e., monthly
payment) for a ₱450,000 debt which is to be
repaid in 2 years at 9% compounded monthly.
AMORTIZATION SCHEDULE
An amortization schedule is a table that shows the
flow of money after each installment. It is
composed of columns containing the number of
payment or date of payment, payment per
period, payment on principal, payment on
interest, and balance of loan. On the table, the
borrower can check the remaining balance after
each installment or whenever he wants to pay the
debt in full.
To construct an amortization schedule, follow
these steps:
1. Solve for the periodic payment (𝑹).
2. Prepare the table with the indicated
column headings and (𝒏 + 𝟏) rows.
3. A. Place the original debt on the 0th row
under “Balance of Loan.” Then place the
periodic payment (𝑹) on the 1st to last row
under “Total Payment.”
B. Get the interest payment (𝑰𝑷) for the
first period by multiplying original debt
𝒋
by the interest rate per period (𝒎)
C. Subtract 𝑰𝑷 from the regular payment
to get the payment on principal
repayment for the first period.
D. Deduct the payment on principal from
the debt to get the balance of the loan
at the end of first period.
4. Repeat Step 3 for the other rows until your
reach the final period. A balance of 0 at
the end of the term indicates that the debt
is completely paid.
Examples:
1. Create an amortization for Example #1 on
amortization.
2. A ₱65,000 loan at 12% compounded
semiannually is to be amortized every 6
months for 3 years. Find the semiannual
payment and construct a amortization
table.
OUTSTANDING PRINCIPAL
- Also known as 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒃𝒂𝒍𝒂𝒏𝒄𝒆
- This refers to the remaining or current balance
on a loan, at a particular date. It is the amount
that the borrower needs to pay if he wants to
pay the debt in full even before the last
payment.
- It can be solved by subtracting the future
made.
(𝟏 + 𝒊)𝒏 − 𝟏
𝑶𝑷 = 𝑷(𝟏 + 𝒊)𝒏 − 𝑹 [ ]
𝒊
Where P = principal or the loan
𝒋
𝒊 = interest rate per period (𝒎)
R = periodic payment
n = number of payments made
another formula:
𝟏 − (𝟏 + 𝒊)−(𝒏−𝒑)
𝑶𝑷 = 𝑹 [ ]
𝒊
Where R = periodic payment
𝒋
𝒊 = interest rate per period (𝒎)
n = original number of periods
p = number of payments made
(𝒏 > 𝒑)
Examples:
1. A catering business took out a bank loan and
plans to repay it through 5 annual
amortizations amounting to ₱192,819.34 each.
If the bank charged an interest of 9%
compounded semiannually, find the
outstanding principal after the 3rd year?
2. A growing business has moved to a new
building to service client pool. The building
has been acquired through a ₱15 million bank
loan with 12% interest compounded monthly. If
the agency amortizes the loan with monthly
₱200,000 payments, what is the outstanding
balance in 5 years?
MORTGAGE
A 𝒎𝒐𝒓𝒕𝒈𝒂𝒈𝒆 is a loan in which a debtor’s real (or
personal property) functions as the collateral,
usually used to a home loan.
𝑭𝒊𝒙𝒆𝒅 𝒓𝒂𝒕𝒆 𝒎𝒐𝒓𝒕𝒈𝒂𝒈𝒆 – a fixed amount is paid
regularly for the entire term of the loan
𝑨𝒅𝒋𝒖𝒔𝒕𝒂𝒃𝒍𝒆 𝒓𝒂𝒕𝒆 𝒎𝒐𝒓𝒕𝒈𝒂𝒈𝒆𝒔 – interest rate (as
well as the payment) can change at some point