You decided to take advantage of the Black Friday deals and buy kitchen cabinets at Home Depot. You will be paying for the cabinets with a Home Depot consumer loan in the amount $6,730. To pay off the loan you will be required to make monthly payments for 5 years. The loan interest rate is 6 percent per year. Calculate the amount of each payment.

$130

Explanation:

To calculate the periodic payment of a loan, a loan amortization formula is used. Loan amortization refers to the division or spreading out of a loan to fixed amounts to be paid over the tenure of the loan. The formula for loan amortization is given as follow:

P = {A[r(1+r)^n]} ÷ {[(1+r)^n]-1} (1)

Where,

P = Monthly payment = ?

A = Amount of the loan = $6,730

r = interest rate = 6% per year = 0.06 per year

 = (0.06 ÷ 12) per month =  0.005  per month

n = number of period = 5 years = (5 × 12) = 60 months

We can now substitute each of the figures into equation (1) as follows:

P = {6730[0.005(1+0.005)^60]} ÷ {[(1+0.005)^60]-1}

  = {6730[0.005(1.005)^60]} ÷ {[(1.005)^60]-1}

  = {6730[0.005 × 1.3488501525493]} ÷ {1.3488501525493 - 1}

  = {6730 × 0.00674425076274652} ÷ {0.3488501525493}

  =  45.3888076332841  ÷ 0.3488501525493

P = 130.109754293053 which is approximately $130 per month

Their, $130 monthly payments will be paid for 5 years.