FINANCE

SIMPLE INTERESTS ON THE UNPAID BALANCE

EQUAL PRINCIPAL PAYMENT

Most loans calculate interest using simple interest on the unpaid balance. Using this method,
we no longer assume that the full amount is borrowed for the entire time period. Instead, we
make principal payments. Thus, we get a lower unpaid balance in which to calculate interest.
The loan payments can be figured using two different methods. Equal Principal Payment
(EPP) and Equal Total Payment (ETP).

Equal principal payments have three main characteristics. The principal portion of the total
payment stays the same each period. In addition, because we are taking into account making a
principal payment every period, thus resulting in a lower unpaid balance, interest payments
decline, and the total payment goes down.
Total Payment
Interest

Principal

The formulas for equal principal payment are as follows:

Principal Payment = Loan Amount / number of payments

Interest Payment = Unpaid balance of Loan * Rate

**Make sure that the rate is in the terms you are paying back

Periodic Payment = Principal Payment + Interest Payment

Example: Assume you have a $10,000 loan at 9% simple annual interest on the unpaid
balance for 6 years with annual payments.

A. How many periods are there?

6 years times once a year = 6 periods

A. What is the principal portion of the periodic payment?

Principal Payment = Loan Amount / number of periods
10,000 / 6 = $1666.67

B. What is the total interest paid over the life of the loan?
In order to answer this question, the table on the following page may be
helpful.
 Beginning Principal Interest Periodic Ending Loan
Period Loan Balance Payment Payment Payment Balance
1 10,000 1666.67 900 2566.67 8333.33
2 8333.33 1666.67 750 2416.67 6666.66
3 6666.66 1666.67 600 2266.67 4999.99
4 4999.99 1666.67 450 2116.67 3333.32
5 3333.32 1666.67 300 1966.67 1666.65
6 1666.65 1666.67 150 1816.67 - .02

TOTALS 10,000.02 3150 XXXXXXXX

Interest Payment #1 = 10,000 * .09 * 1 = 900

Interest Payment #2 = 8333.33* .09 * 1 = 750
Interest Payment #3 = 6666.66* .09 * 1 = 600
Interest Payment #4 = 4999.99* .09 * 1 = 450
Interest Payment #5 = 3333.32* .09 * 1 = 300
Interest Payment #6 = 1666.65* .09 * 1 = 150

Periodic Payment is just the Principal Payment and the Interest Payment added together.

The ending balance is calculated by taking the beginning balance of the loan for the
period and subtracting ONLY the principal. Remember that the only thing that knocks
down the balance of the loan is the PRINCIPAL payment.

The ending balance for one period is the beginning balance for the next period.

Note: You can adjust your principal payment by the two cents to come out even. At the
end of the loan, you get a note from your banker and they tell you what your last payment
is.

D. How much interest is paid in the first year?

This is just the interest in the first period - $900

E. What is the first periodic payment for the second year?

This is just the periodic payment for the second period - $9083.33