Basic Concepts and Solving

Problem on Business and

Consumer Loans
October 30, 2024

O 1. illustrate business and consumer loans,

B 2. distinguish between business and consumer loans,
J 3. compute for the down payment on mortgage and
E the amount of mortgage loan,
C
T 4. determine how payment is applied to interest and
I principal, and determine the balance of the loan
V after each payment,
E 5. prepare an amortization table, and
S
6. solve problem involving business and consumer loan.
Consumer vs. Business Loans
Question:
• How can loans help us in our everyday lives?
• Can loans be a bad thing? Why do you think so?
Loan
a debt provided by one entity (an individual or an organization) to another entity
at an agreed interest rate

Example:
Personal loans
Mortgages
Government bonds
Bank loans
Consumer Loans
loans given to individuals for personal or family purpose

Example:
Educational loans
Bank loans for personal purposes such
as gadgets, tuition fee and cars, and
housing loans
 Business Loans
loans given to individuals or groups of people for business purposes

Example:
Bank loans for starting business, equipment, and expansion
Example 1: Identify if the following scenario shows a
business loan or a consumer loan.

a. Mr. Gamboa’s daughter is entering college. He decided

to apply for a loan so he can use the money to fund his
daughter’s tuition fee.

b. Regine wants to expand her clothing business. She

decided to apply for a loan so she can use the money
for new equipment.
Example 2: Chris bought a new laptop. After paying the
down payment, the amount of the loan is ₱30 000 with an
interest rate of 8% compounded quarterly. The term of the
loan is 1 year. How much will be her quarterly payment?

Solution:
1. Given:
𝑟
𝑖= 𝑛 =𝑚⋅𝑡
𝑃𝑉 = ₱30 000 𝑚
=4⋅1
𝑟 = 8% or 0.08 =
0.08
=4
𝑚=4 4
𝑡 = 1 year = 0.02
2.
1 − 1 + 𝑖 −𝑛
𝑃𝑉 = 𝑅
𝑖
1 − 1 + 0.02 −4 1
30 000 = 𝑅
0.02
30 000
𝑅=
1 − 1 + 0.02 −4(1)
0.02
30 000
𝑅≈
3.807728699
𝑹 ≈ 𝟕 𝟖𝟕𝟖. 𝟕𝟏
Individual Practice:

1. Justin obtained a loan worth ₱30 000. The term of

transaction is 13% simple interest payable after two years.
How much will he pay on the maturity date?
Answer: ₱37 800

1. Ella loaned ₱10 000 at 9% compounded quarterly. How

much will she pay if she will settle this loan after two
years?
Answer: ₱11 948.31
Regular Payments

Mortgage
a business loan or a consumer loan that is secured with a collateral

Regular Payment of an Ordinary Annuity

The regular payment of an ordinary annuity is given by:

𝑃𝑉 ⋅ 𝑖
𝑅=
1 − (1 + 𝑖)−𝑛

where
𝑃𝑉 is the present value of the annuity
𝑖 is the periodic interest rate
𝑛 is the number of compounding periods
Example:
A loan worth ₱1 000 is to be repaid using quarterly payment
for one year at 10% interest compounded quarterly. What is
the regular payment?
𝑃𝑉 ⋅ 𝑖
𝑅= −𝑛
1− 1+𝑖
0.10
1 000
4
= −4 1
0.10
1− 1+
4
= 265.82
 Amortization
a payment scheme wherein the loan is repaid through regular equal payments

Amortization Schedule
a complete table of periodic loan payments, showing the amount of principal and
the amount of interest that comprise each payment until the loan is paid off at
the end of its term

For interest payment, use the previous outstanding principal or outstanding

balance and multiply it by the periodic rate.

For principal repayment, deduct the interest payment from that period’s
payment.

For outstanding principal, deduct the principal repayment from the previous
outstanding balance.
Example:
A loan worth ₱1 000 is to be amortized for one year at 10% interest
compounded quarterly and quarterly payment of ₱265.82. Construct
an amortization schedule.

Interest Principal Outstanding

Period Payment
Payment repayment Balance
0 ₱1 000
1 ₱265.82 ₱25.00 ₱240.82 ₱759.18
2 ₱265.82 ₱18.98 ₱246.84 ₱512.34
3 ₱265.82 ₱12.81 ₱253.01 ₱259.33
4 ₱265.81 ₱6.48 ₱259.33 ₱0
Example 1: A loan worth ₱50 000 is to be repaid in two years
at 8% compounded monthly. What is the monthly payment?

Solution:
1. Given:
𝑟
𝑃𝑉 = ₱50 000 𝑖= 𝑛 =𝑚⋅𝑡
𝑚 = 12 ⋅ 2
𝑟 = 8%, or 0.08 0.08
𝑚 = 12 = = 24
12
𝑡 = 2 years
= 0.006
2.
𝑃𝑉 ⋅ 𝑖
𝑅=
1 − 1 + 𝑖 −𝑛
50 000 0.006
= −24
1 − 1 + 0.006
= 𝟐 𝟐𝟔𝟏. 𝟑𝟔
Example 2: A mortgage is amortized for two years at an
interest rate of 6% compounded monthly and a monthly
payment of ₱3 000. What is the original value of the
mortgage?

Solution:
1. Given:
𝑟
𝑅 = ₱3 000 𝑖=
𝑚
𝑛 =𝑚⋅𝑡
𝑟 = 6%, or 0.06 0.06 = 12 ⋅ 2
𝑚 = 12 = = 24
12
𝑡 = 2 years = 0.005
2. 1 − 1 + 𝑖 −𝑛
𝑃𝑉 = 𝑅
𝑖
1 − 1 + 0.005 −24
= 3 000
0.005
= 𝟔𝟕 𝟔𝟖𝟖. 𝟔𝟎
Individual Practice:

1. James borrowed ₱300 000 from a bank to fund the

equipment for his business. The loan is to be repaid in two
years at 12% compounded semiannually. What is his
semiannual payment?
Answer: ₱86 577.45

2. A mortgage is amortized over a year at an interest rate of

10% compounded quarterly and quarterly payments of
₱10 000. What is the value of the mortgage?
Answer: ₱37 619.74
Solving Problems Involving Consumer Loans

Consumer loans
These are loans given to individuals for personal or family purpose. It can be said
that consumer loans are generally simpler than business loans. This is mainly
because business tends to adjust to more variables such as cash flow, adjustment
of terms, and the variability of amounts.

Example:
Housing loan
Gadget loans
Car loans
Example 1: Ara wants to buy a phone that requires ₱3 000
down payment and monthly installments of ₱1 200 for one
year. What is the actual price of the phone if the prevailing
interest rate is 6% compounded monthly?
Solution:
1. Given:
downpayment = ₱3 000
𝑅 = ₱1 200
r = 6% or 0.06
𝑡=1
𝑚 = 12
𝑟 0.06
𝑖= = = 0.005
𝑚 12
2.
1 − 1 + 𝑖 −𝑚𝑡
𝑃𝑉 = 𝑅
𝑖
−12(1)
1 − 1 + 0.005
𝑃𝑉 = 1 200
0.005
−12
1 − 1.005
𝑃𝑉 = 1 200
0.005
𝑃𝑉 = 13 942.72
3.
Price = Down Payment + Present Value
Price = ₱3 000 + ₱13942.72
Price = ₱𝟏𝟔 𝟗𝟒𝟐. 𝟕𝟐
Example 2: Wenzy decided to buy a new laptop that costs
₱36 000. It requires monthly installments of ₱1 400 at 8%
compounded monthly. How long would she make payments
to fully pay her laptop?

Solution:
1. Given:
𝑃𝑉 = 36 000
𝑅 = 1 400
𝑟 = 8% = 0.08
𝑚 = 12
𝑟 .08
𝑖= = = 0.006667
𝑚 12
 2.
−𝑚𝑡
1− 1+𝑖
𝑃𝑉 = 𝑅
𝑖

.08 −12𝑡 36 000 1 − 1.006667 −12𝑡

1− 1+ =
12 1 400 0.006667
36 000 = 1400
.08 1 − 1.006667 −12𝑡
12 25.71428571 =
1 − 1 + 0.006667 −12𝑡 0.006667
36 000 = 1 400 0.1714285714 = 1 − 1.006667 −12𝑡
0.006667 1.006667 −12𝑡 = 1 − 0.1714285714
1.006667 −12𝑡 = 0.8285714286
−12𝑡 log(1.006667) = log(0.8285714286)
log 0.8285714286
𝑡 =
−12 log 1.006667
𝑡 = 2.358479726 ≈ 𝟐. 𝟒
Individual Practice:

1. Mark loaned ₱15 000 at 8% compounded semi-annually

last May 15, 2019. How much will he pay if he will settle
this loan on May 15, 2020?
Answer: ₱16 224

2. Flor wants to buy a new TV that requires ₱8 000 down

payment and monthly installments of ₱2 500 for 12
months. Find the actual price of the TV if the prevailing
interest rate is 8% compounded monthly.
Answer: ₱36 739.45
Solving Problems
Involving
Business Loans

Loan
Amortization
Schedule
Loan
Amortization
Schedule
Loan
Amortization
Schedule
Loan
Amortization
Schedule
Business loans
• These are loans for businesses, company’s expenses and financial needs.
• They require the business owners to sign as guarantors.
• The term of the business loan is generally shorter than the consumer loan and
the interest for the business loan is usually higher than that of the consumer
loan.

Outstanding Balance
It is the remaining unpaid amount of loan or financial obligation as of particular
date. It can be computed using Prospective Method or Retrospective method.
 Outstanding Balance under Perspective Method
It is used when all regular payments are equal. It calculates the outstanding
balance as a present value of all future payments to be made. This computes the
present value and is used when 𝑛𝑡 is known.

− 𝑚𝑡−𝑘
𝑅[1 − 1 + 𝑖 ]
𝑂𝐵𝑘 =
𝑖

where
𝑂𝐵𝑘 = the outstanding balance
𝑘 = the number of past payments
𝑚𝑡 − 𝑘 = the number of payments to be made

Example:

Annika borrowed money from a bank to be used for the expansion of her business
amounting to ₱500 000 at 9% interest compounded semi-annually. It is to be repaid by
equal payments of ₱38 438.07 every 6 months for 10 years. What is the outstanding
balance after 2 years?
Example:

Annika borrowed money from a bank to be used for the expansion of her business
amounting to ₱500 000 at 9% interest compounded semi-annually. It is to be repaid by
equal payments of ₱38 438.07 every 6 months for 10 years. What is the outstanding
balance after 2 years?

Solution:
− 𝑚𝑡−𝑘
𝑅[1 − 1 + 𝑖 ]
𝑂𝐵𝑘 =
𝑖
− 20−4
0.09
38 438.07[1 − 1 + ]
2
=
0.09
2
= 𝟒𝟑𝟏 𝟖𝟏𝟑. 𝟖𝟖
 Interest paid and Repayment of the Principal on
the 𝒌th payment
Interest paid on the 𝑘th payment

−(𝑛−𝑘)
𝐼𝑘 = 𝑅 1 − 1 + 𝑖

Repayment to the Principal of the 𝑘 th payment

𝑃𝑘 = 𝑅 − 𝐼𝑘

Example:
Annika borrowed money from a bank to be used for the expansion of her
business amounting to ₱500 000 at 9% interest compounded semi-annually. It
is to be repaid by equal payments of ₱38 438.07 every 6 months for 10 years.
Find the interest paid and repayment to the principal on the 10th payment.
Example:
Annika borrowed money from a bank to be used for the expansion of her
business amounting to ₱500 000 at 9% interest compounded semi-annually. It
is to be repaid by equal payments of ₱38 438.07 every 6 months for 10 years.
Find the interest paid and repayment to the principal on the 10th payment.

Solution:
Interest paid on the 10th payment:
𝐼𝑘 = 𝑅 1 − 1 + 𝑖 −(𝑛−𝑘)
− 20−10
0.09
𝐼𝑘 = 38 438.07 1 − 1 +
2
𝐼𝑘 = 13 686.73 Repayment to the Principal of the 𝑘th payment:
𝑃𝑘 = 𝑅 − 𝐼𝑘
𝑃𝑘 = 38 438.07 − 13686.73
𝑷𝒌 = 𝟐𝟒 𝟕𝟓𝟏. 𝟑𝟒
 Outstanding Balance under Retrospective Method
Retrospective method is used if there is an irregular payment, that is, the final
payment is not equal to the regular payment. It calculates the loan balance as the
accumulated value of the loan at a particular date minus the future value of the
regular payments made at a particular date. This computes the future value and is
used when 𝑛𝑡 is not known.
𝑘
𝑅[ 1 + 𝑖 𝑘 − 1]
𝑂𝐵𝑘 = 𝑃(1 + 𝑖) −
𝑖

Example:
Elisse borrowed money from a bank to be used for the
expansion of her business amounting to ₱500 000 at 9%
interest compounded semi-annually. It is to be repaid by
equal payments of ₱38 438.07 every 6 months. What is
the outstanding balance after 2 years?
Example:
Elisse borrowed money from a bank to be used for the
expansion of her business amounting to ₱500 000 at 9%
interest compounded semi-annually. It is to be repaid by equal
payments of ₱38 438.07 every 6 months. What is the
outstanding balance after 2 years?
Solution:
𝑘
𝑘
𝑅[ 1 + 𝑖 − 1]
𝑂𝐵𝑘 = 𝑃(1 + 𝑖) −
𝑖
4
0.09
38 438.07 1+ −1
0.09
4 2
𝑂𝐵𝑘 = 500 000 1 + −
2 0.09
2
𝑶𝑩𝒌 = 𝟒𝟑𝟏 𝟖𝟏𝟑. 𝟖𝟖
Example 1: Mr. Mondragon made a loan from a bank to be
used for the equipment of his business amounting to
₱300 000 at 9% interest compounded semi-annually. If this is
to be repaid by equal payment every 6 months for four years,
find the semi-annual payments.
Solution:
1. Given:

𝑃 = ₱300 000
𝑟 = 9% = 0.09
𝑡=4
𝑚=2
𝑟 .06
𝑖= = = 0.045
𝑚 2
2.
1 − 1 + 𝑖 −𝑛
𝑃=𝑅
𝑖
−2(4)
1 − 1 + 0.045
300 000 = 𝑅
0.045
1 − 1.0.045 −8
300 000 = 𝑅
0.045
0.045
𝑅 = 300 000 −8
1 − 1.0.045

𝑅 = 300 000 0.020276394

𝑹 = 𝟒𝟓 𝟒𝟖𝟐. 𝟗𝟎
KEY POINTS
Loan
1 a debt provided by one entity (an individual or an organization) to another entity
at an agreed interest rate

2 Consumer Loans
loans given to individuals for personal or family purpose.

3 Business Loans
loans given to individuals or groups of people for business purposes
 Mortgage
3 a business loan or a consumer loan that is secured with a collateral

4 Regular Payment of an Ordinary Annuity

The regular payment of an ordinary annuity is given by:

𝑃𝑉 ⋅ 𝑖
𝑅=
1 − (1 + 𝑖)−𝑛

where
𝑃𝑉 is the present value of the annuity
𝑖 is the periodic interest rate
𝑛 is the number of compounding periods
 Amortization
5 a payment scheme wherein the loan is repaid through regular equal payments

Amortization Schedule
6 a complete table of periodic loan payments, showing the amount of principal and
the amount of interest that comprise each payment until the loan is paid off at
the end of its term

Consumer loans
7 These are loans given to individuals for personal or family purpose. It can be said
that consumer loans are generally simpler than business loans. This is mainly
because business tends to adjust to more variables such as cash flow, adjustment
of terms, and the variability of amounts.
 Business loans
81 • These are loans for businesses, company’s expenses and financial needs.
• They require the business owners to sign as guarantors.
• The term of the business loan is generally shorter than the consumer loan and
the interest for the business loan is usually higher than that of the consumer
loan.

93 Outstanding Balance
It is the remaining unpaid amount of loan or financial obligation as of particular
date. It can be computed using Prospective Method or Retrospective method.
11
10 Outstanding Balance under Perspective Method
It is used when all regular payments are equal. It calculates the outstanding
balance as a present value of all future payments to be made. This computes the
present value and is used when 𝑛𝑡 is known.

− 𝑚𝑡−𝑘
𝑅[1 − 1 + 𝑖 ]
𝑂𝐵𝑘 =
𝑖

where
𝑂𝐵𝑘 = the outstanding balance
𝑘 = the number of past payments
𝑚𝑡 − 𝑘 = the number of payments to be made
11
11 Interest paid and Repayment of the Principal on
the 𝒌th payment
Interest paid on the 𝑘th payment

𝐼𝑘 = 𝑅 1 − 1 + 𝑖 −(𝑛−𝑘)

Repayment to the Principal of the 𝑘 th payment

𝑃𝑘 = 𝑅 − 𝐼𝑘
12 Outstanding balance of Retrospective Method
Retrospective method is used if there is an irregular payment, that is, the final
payment is not equal to the regular payment. It calculates the loan balance as the
accumulated value of the loan at a particular date minus the future value of the
regular payments made at a particular date. This computes the future value and is
used when 𝑛𝑡 is not known.

𝑘
𝑅[ 1 + 𝑖 − 1]
𝑂𝐵𝑘 = 𝑃(1 + 𝑖)𝑘 −
𝑖
Thank You
for
Listening!