Because the loan balance declines to zero, the five equal payments do pay off the loan. Notice that the interest paid declines each period. This isn't surprising because the loan balance is going down. Given that the total payment is fixed, the principal paid must be rising each period.

If you compare the two loan amortizations in this section, you will see that the total interest is greater for the equal total payment case, $1,427.31 versus $1,350. The reason for this is that the loan is repaid more slowly early on, so the interest is somewhat higher. This doesn't mean that one loan is better than the other; it simply means that one is effectively paid off faster than the other. For example, the principal reduction in the first year is $835.46 in the equal total payment case as compared to $1,000 in the first case. Many web sites offer loan amortization schedules. See our nearby Work the Web box for an example.

Work the Web

Preparing an amortization table is one of the more tedious time value of money applications. Using a spreadsheet makes it relatively easy, but there are also web sites available that will prepare an amortization table very quickly and simply. One such site is CMB Mortgage. Their web site has a mortgage calculator for home loans, but the same calculations apply to most other types of loans such as car loans and student loans. Suppose you graduate with a student loan of $30,000 and will repay the loan over the next 10 years at 7.63 percent. What are your monthly payments? Using the calculator, we get:

Loan Balance: |300QQ.00 Interest Rate: 63 Period:

Calc Loan Bal

Student Loan Consolidation

Student Loan Consolidation

When we talk about college graduation, several promising life changes occur in our minds potential careers, independence as well as new beginnings. However, although it means beginning of something, it still signifies something less enjoyable too the repayment of student loans.

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