Question

If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest (round to the nearest dollar)? How much of his first payment will be applied to interest? To principal? How much of his second payment will be applied to each?

Short answer

• Equated annual payment = $12,324
• Amount in first payment applied to interest is $6,000.
• Amount in first payment applied to principal is $6,324.
• Amount in second payment applied to interest is $5,368.
• Amount in first payment applied to principal is $6,956.

Step-by-step solution

Computation of Equal Annual Payments

Component of interest and principal

Year	Principal (A-B)	Interest (B)Balance X rate	Annual Payment (A)	Balance (B)
				$60,000
1	$6,324	$6,000	$12,324	$53,676
2	$6,956	$5,368	$12,324	$46,720