Study Guide - Inst. Loans, Monthly pay, and Length of Loan

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What is an installment loan?

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An installment loan is a type of loan that is repaid over time with a set number of scheduled payments. The loan amount, interest rate, and repayment period are agreed upon at the start.

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How do you calculate the monthly payment for an installment loan?

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The monthly payment can be calculated using the formula: M = P[r(1+r)^n] / [(1+r)^n – 1], where M is the total monthly payment, P is the principal loan amount, r is the monthly interest rate, and n is the number of payments.

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What is the impact of a longer loan term on monthly payments and total interest paid?

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A longer loan term generally results in lower monthly payments but increases the total interest paid over the life of the loan.

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What is APR (Annual Percentage Rate)?

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APR is the annual rate charged for borrowing or earned through an investment, expressed as a percentage. It includes any fees or additional costs associated with the loan.

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How do finance charges work in installment loans?

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Finance charges are the total cost of borrowing, including interest and any additional fees, calculated over the life of the loan.

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What is the formula to calculate total finance charges?

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Total finance charges can be calculated by subtracting the principal amount from the total amount paid over the life of the loan.

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What is the relationship between interest rates and monthly payments?

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Higher interest rates lead to higher monthly payments, while lower interest rates result in lower monthly payments.

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What is the significance of making extra payments on an installment loan?

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Making extra payments can reduce the principal balance faster, leading to lower total interest paid and a shorter loan term.

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How does the length of a loan affect the total interest paid?

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Longer loans typically result in more interest paid because interest accrues over a longer period.

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What is a balloon payment?

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A balloon payment is a large final payment due at the end of a loan, often used in loans with lower monthly payments.