Tanya is trying to prepare her loan amortization schedule for the renovation of her bed-and-breakfast facility. Her banker is quoting her an interest rate of 12% for four years. The loan amount of $25,000. Prepare the loan amortization schedule.
To prepare the loan amortization schedule, you need to follow these steps:
Step 1: Calculate the monthly interest rate
Convert the annual interest rate to a monthly interest rate by dividing it by 12. In this case, the annual interest rate is 12%, so the monthly interest rate would be 12% / 12 = 1% or 0.01.
Step 2: Calculate the number of monthly payments
Multiply the number of years by 12 since there are 12 months in a year. In this case, Tanya has a loan term of 4 years, so the number of monthly payments would be 4 * 12 = 48.
Step 3: Determine the monthly payment amount using the loan amount, interest rate, and number of payments.
To calculate the monthly payment, you can use the loan amortization formula:
M = P * (r * (1 + r)^n) / ((1 + r)^n - 1)
Where:
M = Monthly payment
P = Loan amount
r = Monthly interest rate
n = Number of payments
Plugging in the values, we get:
M = $25,000 * (0.01 * (1 + 0.01)^48) / ((1 + 0.01)^48 - 1)
Calculating this expression will give you the monthly payment amount.
Step 4: Prepare the loan amortization schedule
The loan amortization schedule lists the breakdown of each payment over the loan term. It includes the payment number, starting balance, interest payment, principal payment, and ending balance.
Using the monthly payment amount calculated in Step 3, you can determine the interest and principal components of each payment. Starting with the initial loan balance, you can calculate the interest payment using the monthly interest rate. The principal payment is the difference between the monthly payment and the interest payment. The ending balance is the difference between the starting balance and the principal payment.
Continue this calculation for each payment, adjusting the starting balance, and repeat until you reach the final payment.
By following these steps, you should be able to prepare the loan amortization schedule for Tanya's loan.