One of the most common financial instruments a person will ever encounter is an installment loan such as a car or home loan. For these types of loans, an amount of money is borrowed. This amount plus interest is paid back over with fixed payments. In general, payments are made on a monthly basis. The length of time over which the payments are made (the term) may be as short as 36 to 72 months for an auto loan. Or the payments may be made over a 15 to 30 year term for a home loan.
Since these loans behave like a decreasing annuity, we can use the formulas we have developed in earlier sections to compute the payment on the loan. In this section we will compute the payment for several different loans and track those payments in a special type of table called an amortization table.
Read in Section 5.4
- How do you find the present value of an annuity?
- How is a loan amortized?
- How do you make an amortization table?
Caution! – The videos use P instead of PV for the present value and A instead of FV for future value.