In a(n) _________ , simple interest is added on to the amount borrowed and the total is repaid in equal installments.
In a(n) installment loan, simple interest is added on to the amount borrowed and the total is repaid in equal installments.
To calculate the amount of each installment, you need to know the principal amount (the initial amount borrowed), the interest rate, and the duration of the loan. The interest rate is usually stated as an annual percentage rate (APR).
First, convert the APR into a monthly interest rate by dividing it by 12. For example, if the APR is 6%, the monthly interest rate would be 6% divided by 12, which equals 0.5%.
Next, divide the principal amount by the number of months in the loan term to determine the amount of each installment before interest. For example, if you borrow $10,000 and the loan term is 36 months, the initial installment amount would be $10,000 divided by 36, which equals $277.78.
To calculate the interest for each installment, multiply the outstanding balance (which decreases with each payment) by the monthly interest rate. Subtract this interest amount from the installment amount to determine how much of the payment is applied to the principal.
Repeat this calculation for each installment until the loan is fully repaid. Each payment will consist of a portion of the principal amount and the interest that accrues for that period. As you make the payments, the outstanding balance decreases until the loan is completely paid off.