Question

Amortization. Loan Consolidated Incorporated (LCI) is offering a special one-time package to reduce Custom Autos’ outstanding bills to one easy-to-handle payment plan. LCI will pay off the current outstanding bills of $244,000 for Custom Autos if Custom Autos will make an annual payment to LCI at a 9% interest rate over the next 5 years. First, what are the annual payments and the remaining balance of the loan at the end of each year (should Custom Autos want to pay off the loan early)? Second, when will the balance be half paid off? Finally, what is the total interest expense on the loan over the fifteen years?

Answer 1

Period of loan is given differently as 5 years and fifteen years in the problem. The correct period is assumed as 15 years.

Annual payment = $30,270.37 as follows:

Remaining balance at the end of each year is appended in the amortization schedule below:

Half the balance is paid off in about 10 years (as in the amortization schedule above).

Total payment= $30,270.37*15 = $454,055.51

Interest paid over 15 years= $454,055.51 - $244,000 = $210,055.51