Loan Amortization: Example and Explanation

Prepared by Pamela Peterson Drake

Problem

Amortize a 6% loan of $25,000 that is paid back in four annual end-of-period installments.

Solution

Note: Place your cursor over a value to determine how to calculate it.

Step 1: Determine the given information

Rate

i

=

6%

Loaned amount

PV

=

$25,000

Number of payments

N

=

4

Step 2: Solve for the payment amount

Payment

PMT

=

$7,214.79

Step 3: Amortize the loan, breaking the payment into interest and principal repayments

Year

Beginning of the year balance

Payment

Interest

Principal in payment

Ending principal

1

$25,000.00

$7,214.79

$1,500.00

$5,714.79

$19,285.21

2

$19,285.21

$7,214.79

$1,157.11

$6,057.67

$13,227.54

3

$13,227.54

$7,214.79

$793.65

$6,421.14

$6,806.40

4

$6,806.40

$7,214.79

$408.38

$6,806.40

$0.00

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