Each payment covers the interest expense plus reduces principal. Consider a 4 year loan with annual payments. The interest rate is 8%, and the principal amount is $4969. What is the annual payment? (in dollars)

$1,500

Explanation:

In this question, we are asked to calculate annual interest payment for a loan.

We proceed as follows:

Firstly, let’s assign variables as follows; let the amount of loan is P, monthly interest rate is r and term of loan is n

P = $4,979 , r = 8% =8/100 = 0.08 and n = 4 years

The equated monthly installment is mathematically =

EMI = P *r*[(1+r)^n] /[(1+r)^n -1]

EMI = 4969*0.08*[(1+0.08)^4] / [(1+0.08)^4 - 1]

EMI = 397.52*1.36/1.36048896 - 1

EMI = 540.6272/0.36048896= $1499.71 rounded to $1500

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