Loan Instalment Calculation Using Compound Interest
The problem asks us to find the value of each equal yearly instalment for a loan amount ($P$) of $3,825$, repaid over two years with a compound interest rate ($R$) of 4% per annum, compounded annually.
Problem Variables
- Principal Loan Amount ($P$): $3,825$
- Annual Interest Rate ($R$): $4\%$ or $0.04$
- Number of Instalments ($n$): $2$
- Instalment Amount: Let this be $x$
Instalment Formula
When a loan is repaid in equal instalments ($x$) over $n$ periods at a compound interest rate $R$, the principal amount $P$ is equal to the sum of the present values of all instalments. The formula is:
$ P = \frac{x}{(1+R)^1} + \frac{x}{(1+R)^2} + \dots + \frac{x}{(1+R)^n} $For $n=2$, the formula becomes:
$ P = \frac{x}{1+R} + \frac{x}{(1+R)^2} $Calculation Steps
- Substitute the known values into the formula: $ 3825 = \frac{x}{1+0.04} + \frac{x}{(1+0.04)^2} $
- Simplify the denominators: $ 3825 = \frac{x}{1.04} + \frac{x}{(1.04)^2} $ $ 3825 = \frac{x}{1.04} + \frac{x}{1.0816} $
- Factor out $x$: $ 3825 = x \left( \frac{1}{1.04} + \frac{1}{1.0816} \right) $
- Find a common denominator for the terms inside the parenthesis: $ 3825 = x \left( \frac{1.0816 + 1.04}{1.04 \times 1.0816} \right) $ $ 3825 = x \left( \frac{2.1216}{1.124864} \right) $ Alternatively, use the simplified formula derived from the annuity formula: $P = x \times \frac{1 - (1+R)^{-n}}{R}$ is for ordinary annuities, but for loan redemption it's often simpler to use the sum of present values. Let's stick to the sum of present values approach as it's more direct here. Re-calculating step 3's simplification: $ 3825 = x \left( \frac{1.04 + 1}{(1.04)^2} \right) $ $ 3825 = x \left( \frac{2.04}{1.0816} \right) $
- Solve for $x$: $ x = 3825 \times \frac{1.0816}{2.04} $ $ x = 3825 \times 0.530196... $ $ x \approx 2028.00 $
Therefore, the value of each equal yearly instalment is approximately $2,028$.
Important Questions from Installments
A loan of Rs. 1,50,000 is availed with compound interest rate of 10% per annum for two years compounded annually. It is to be paid in equal yearly installments, and the installment is to be paid at the end of each year. The value of the equal yearly installment is : (Rounded off to two places of decimal)
To buy a car, Sahil borrowed some amount at 10% simple interest rate. He has paid some loan amount but Rs. 1,81,500 is due which he has to pay in 3 years. What will be the annual installment (in Rs.)?
What annual installment will discharge a debt of Rs. 35,455 due in three years at 12% simple interest per annum (Installments will be paid at the end of the years)(Round off to nearest Rupee)?
Ravi borrowed ₹1,380 from a bank which he repaid in 6 years at the rate of 6% per annum simple interest. If payment was made in six equal instalment, then each instalment was:
Rekha borrowed a sum of Rs. 24,000 at 12% p.a. compound interest. interest compounded yearly, for 3 years. At the end of first year, she repays a sum of Rs. 6,880 and at the end of second year, she repays Rs. 5,400. What amount should she pay at the end of third year to discharge the loan?
