Paying Off Simple Interest Installment Loans

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Section ObjectiveSection ObjectiveCompute:

• final payment when paying off a simple interest installment loan

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final payment (p. 297)

Payment on a simple interest loan that consists of the remaining balance plus the current month’s interest.

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Interest = Principal × Rate × Time

Formula 1Formula 1

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Final Payment = Previous Balance + Current Month’s Interest

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Interest Saved =

Total Payback – (Sum of Previous Payments + Final Payment)

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A Picture Perfect Loan p. 297A Picture Perfect Loan p. 297

Why might a bank not encourage you to pay off a loan early?

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The first 3 months of the repayment schedule for Doug and Donna Collins’s loan of $1,800 at 12 percent interest for 6 months is shown in Figure 8.2 below.

What is the final payment if they pay the loan off with the fourth payment?

Example 1Example 1

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Figure 8.2Figure 8.2

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Find the previous balance.

$913.70

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Find the interest for the fourth month.

Principal × Rate × Time

$913.70 × 12% × 1/12 = $9.137 or $9.14

Example 1 Answer: Example 1 Answer: Step 2Step 2

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Find the final payment.

Previous Balance + Current Month’s Interest

$913.70 + $9.14 = $922.84

Example 1 Answer: Example 1 Answer: Step 3Step 3

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How much would the Collins in Example 1 save by paying off the loan early?

Example 2Example 2

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Step: Find the interest saved.

Total Payback – (Sum of Previous Payments + Final Payment)

(6 × $310.50) – [(3 × $310.50) + $922.84] =

$1,863.00 – [$931.50 + $922.84] =

$1,863.00 – $1,854.34 = $8.66

Example 2 AnswerExample 2 Answer

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Chanelle Thompson took out a simple interest loan of $2,200 at 15 percent for 6 months. Her monthly payment on the loan is $382.80. After 3 payments the balance is $1,120.72. She pays off the loan with the fourth payment.

Practice 1Practice 1

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a. What is the interest?

b. What is the final payment?

c. How much is saved by paying off the loan early?

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a. Interest: $14.01

b. Final payment: $1,134.73

c. Amount saved by paying off the loan early: $13.67

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Alicia Fleming took out a simple interest installment loan of $8,300 at 8 percent for 18 months. The monthly payment is $490.53. After 5 payments, the balance is $6,094.80.

If she pays off the loan when the next payment is due, what is the final payment?

How much is saved by paying off the loan early?

Practice 2Practice 2

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Amount due if she pays off the loan with the next payment: $6,135.43

Amount saved by paying off the loan early: $241.46

Practice 2 AnswerPractice 2 Answer

Paying Off Simple Interest Installment Loans

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