In: Finance

Annuity You are going to borrow money from the bank. But when considering your income, you could afford to spend maximum 4000 euros per year as total repayments . Now, If the loan interest rate is 8% , what would be the maximum loan amount which you can borrow from the bank If the loan has duration of 5 years and the annual loan payment are calculated on the basis of annuity? Find also , what are the second year loan Principal and interest payments.

maximum loan amount = (annual payment/interest rate)*[1 -
1/(1+interest rate)^{duration}]

maximum loan amount = (4000/0.08)*[1 - 1/(1+0.08)^{5}] =
50,000*[1 - 1/1.08^{5}] = 50,000*[1 - 1/1.4693] = 50,000*(1
- 0.6806) = 50,000*0.3194 = 15,970

second year loan Principal is $2,939.96 and interest payment $1,059.82.

Formulas

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