When it comes to borrowing money from a bank, it is common to pay back the loan in installments rather than in one lump sum at the end of the loan period. In this post, we will be discussing how to calculate the amount of those loan installments, specifically in the case of flat rate interest loans.
Firstly, it is important to note that flat rate interest means that it is a simple interest scenario. This means that the interest is calculated on the initial amount borrowed and does not take into account any interest that may accumulate over the course of the loan.
To calculate the installment amount for a flat rate loan, we need to find two key pieces of information: the total amount to be repaid (principal plus interest) and the total number of repayments.
To find the total amount to be repaid, we need to calculate the interest using a simple interest formula. For example, if we want to borrow $10,000 over three years with a 7.6% flat rate, we would calculate the interest as follows:
$10,000 x 0.076 x 3 = $2,280
Adding this interest amount to the principal of $10,000, we get a total amount to be repaid of $12,280.
To determine the total number of repayments, we need to know how many repayments per year are required and the number of years of the loan. For example, if we need to make fortnightly repayments over three years, we would calculate the number of repayments as follows:
26 repayments per year x 3 years = 78 repayments
Finally, we can calculate the installment amount by dividing the total amount to be repaid by the number of repayments:
$12,280 ÷ 78 repayments = $157.44 per fortnight
By calculating the installment amount, we can determine whether or not we can afford to make the repayments for this particular loan.
In summary, calculating the installment amount for a flat rate loan involves finding the total amount to be repaid (principal plus interest) and the total number of repayments. By dividing the total amount to be repaid by the number of repayments, we can determine the installment amount.