Question

Kalsum just borrowed RM50,000 to pay for a new car. She took out an eight year loan with yearly compounding interest of 6.3% p.a. Using Retrospective Method; find the outstanding principal after four years. Ans: RM 28039.64

Answer 1

Step-1. Calculation of the Annual Loan Payment

Loan Amount (P) = RM50,000

Interest Rate (n) = 6.30% per year

Number of years (n) = 8 Years

Loan Payment = [P x {r (1+r)n} ] / [( 1+r)n – 1]

= [RM50,000 x {0.063 x (1 + 0.063)8}] / [(1 + 0.063)8 – 1]

= [RM50,000 x {0.063 x 1.630295}] / [1.630295 – 1]

= [RM50,000 x 0.102709] / 0.630295

= RM8,147.66 per year

Step-2, The outstanding principal after four years

The outstanding principal after four years is calculated by using the following formula

Remaining Balance = [Amount Borrowed x (1 + r) n] – [Annual Payment x {{(1 + r)n -1}/ r]

Loan Amount (P) = RM50,000

Interest Rate (n) = 6.30% per year

Number of years (n) = 4 Years

Annual Payment = RM8,147.66 per year

Outstanding Balance = [Amount Borrowed x (1 + r) n] – [Monthly Payment x {{(1 + r)n -1}/ r]

= [RM50,000 x (1 + 0.063)4] – [RM8,147.66 x {{(1 + 0.063)4 -1}/ 0.063]

= [RM50,000 x 1.276830] – [RM8,147.66 x {(1.276830 – 1) / 0.063]

= [RM50,000 x 1.276830] – [RM8,147.66 x 4.394126]

= RM63,841.50 - RM35,801.86

= RM28,039.64

“Therefore, the outstanding principal after four years would be RM28,039.64”