Question

A firm is advanced a Shs 5 million= loan by a bank to be repaid in equal monthly installments over five years at a rate of interest of 18% per annum. After the 24th installment, the rate of interest is adjusted to 20% per annum and the monthly installment size recomputed such that the loan is fully repaid in the remaining duration of the initially agreed term. After the 36th installment, the rate of interest is lowered by 3% per annum but the monthly installment size is not adjusted, until from the end of the 49th month when it is increased by Shs 29,330. Required: (i) Compute the initially agreed installment and the one after the interest rate adjustment to 20% per annum. (ii) At the end of which month would the loan be fully repaid? (iii) What is the total interest that the firm pays on the loan during its term?

Answer 1

i. Initially Agreed Installment = Loan Amount / PVAF (1.5%,60)

Initially Agreed Installment = 5000000 / 39.3803

Initially Agreed Installment = Shs 126967.14

Total Payments Made till 24th Installment = Installment * 24 = 126967.14 * 24 = Shs 3047211.29

Cumulative Interest Paid till 24th Installment = "CUMIPMT(0.015,60,-5000000,1,24,0)" = Shs 1559209.19

Balance after 24th Installment = Loan Amount - Total Payment made + Cumulative Interest

Balance after 24th Installment = 5000000 - 3047211.29 + 1559209.19

Balance after 24th Installment = Shs 3511997.90

ii. Installment at 20% per Annum = Loan Balance / PVAF(1.67%,36)

Installment at 20% per Annum = 3511997.90 / 26.91

Installment at 20% per Annum = Shs. 130518.43

iii. Loan Schedule

Total Interest Payment = Shs. 2618272.49

Loan Term = on 57th Month the Loan is fully repaid.