1 00:00:00,580 --> 00:00:08,740 In this section, we will understand how loan payments work and what can you calculate if you know certain 2 00:00:08,740 --> 00:00:10,240 parameters of a loan. 3 00:00:11,200 --> 00:00:13,600 So let us first understand how a loan works. 4 00:00:14,620 --> 00:00:18,880 Suppose you take a loan from a bank or any financial institute. 5 00:00:20,410 --> 00:00:27,280 When a loan is sanctioned, you get a sum of money, which is known as the principal amount. 6 00:00:28,770 --> 00:00:33,570 This money, you have to return to the bank by doing certain payments over time. 7 00:00:35,400 --> 00:00:40,770 And apart from the principal amount, you will be paying some interest to the bank. 8 00:00:41,970 --> 00:00:47,970 So before taking the loan, you will also see that there is some interest rate given by the bank. 9 00:00:49,610 --> 00:00:57,230 The payments are usually of equal value and these payments are made over a period of time, for example, 10 00:00:57,230 --> 00:01:00,260 10 years, 20 years or even 30 years. 11 00:01:02,520 --> 00:01:06,930 And whenever you make a payment, there are two parts to that payment. 12 00:01:08,770 --> 00:01:14,620 The first part is the payment of interest that you have accrued in the last period of time. 13 00:01:15,670 --> 00:01:21,670 So, for example, in the first year, with the interest rate of 10 percent, there be some interest 14 00:01:21,670 --> 00:01:22,990 amount also accrued. 15 00:01:24,040 --> 00:01:28,190 So that interest will be paid at the end of the first year. 16 00:01:30,730 --> 00:01:32,620 So that will be first part. 17 00:01:34,190 --> 00:01:38,450 The second part will be the payment of some part of the principal amount. 18 00:01:38,960 --> 00:01:45,410 So suppose the period of time for which you have to make payments is 10 years and you are making a payment 19 00:01:45,740 --> 00:01:47,090 at the end of each year. 20 00:01:48,920 --> 00:01:52,490 So at the end of the year, your principal amount should be zero. 21 00:01:53,570 --> 00:01:59,390 Over the period of 10 years, you'll be paying some amount which will be reducing the principal amount. 22 00:02:01,560 --> 00:02:03,930 So each payment that you make. 23 00:02:05,100 --> 00:02:13,200 Will have to part one is the payment of the interest and second is repayment of some part of the principal 24 00:02:13,200 --> 00:02:13,530 amount. 25 00:02:15,910 --> 00:02:18,610 Let us look at an example to understand this further. 26 00:02:22,830 --> 00:02:28,860 So suppose you have taken a loan of one hundred thousand dollars from a bank which is offering this 27 00:02:28,860 --> 00:02:31,560 amount at an interest rate of 10 percent. 28 00:02:33,440 --> 00:02:39,890 The tone here means that this loan is to be paid within three years. 29 00:02:41,830 --> 00:02:48,460 You'll be making a payment at the end of each year, so the total number of payments you will be making 30 00:02:48,460 --> 00:02:49,090 is three. 31 00:02:51,350 --> 00:02:55,760 The payment that you make each year is of equal value. 32 00:02:57,490 --> 00:03:03,970 So when you calculate this value and we will see how to calculate it in Excel, when we calculate this 33 00:03:03,970 --> 00:03:10,000 value, you will find that the payment value comes out to be forty thousand two hundred eleven. 34 00:03:11,890 --> 00:03:15,220 So this is the payment that you have to make it to the bank. 35 00:03:17,040 --> 00:03:19,530 Out of this, 40 thousand two hundred eleven. 36 00:03:20,910 --> 00:03:23,730 And is the interest for the first year? 37 00:03:24,880 --> 00:03:26,380 You can calculate this also. 38 00:03:27,500 --> 00:03:29,030 The interest rate is 10 percent. 39 00:03:29,210 --> 00:03:31,140 The principal amount is one hundred thousand. 40 00:03:31,430 --> 00:03:34,100 So 10 percent of hundred thousand is 10000. 41 00:03:35,990 --> 00:03:40,680 Sort of forty thousand two hundred eleven thousand is interest and the rest? 42 00:03:40,700 --> 00:03:44,600 Thirty thousand two hundred eleven will reduce the principal amount. 43 00:03:45,720 --> 00:03:51,900 That is the one hundred thousand loan that you have taken out of that thirty thousand two hundred eleven 44 00:03:51,900 --> 00:03:52,710 will be deducted. 45 00:03:54,060 --> 00:04:00,240 So the net balance of the loan would be sixty nine thousand seven hundred eighty nine. 46 00:04:02,450 --> 00:04:07,250 Similarly, in the next year, you'll make another payment of forty thousand two hundred eleven. 47 00:04:08,820 --> 00:04:15,120 This time, the interest is on the balance of last year, which was sixty nine thousand two hundred 48 00:04:15,120 --> 00:04:21,000 eighty nine, 10 percent of this comes out to be six thousand nine hundred seventy nine. 49 00:04:23,010 --> 00:04:29,700 So this part is the interest the rest of the thirty three thousand two hundred thirty three is the payment 50 00:04:29,700 --> 00:04:30,780 towards the principal. 51 00:04:31,840 --> 00:04:37,990 You subtract this payment from the balance of the year and you get thirty six thousand five hundred 52 00:04:37,990 --> 00:04:41,080 fifty six as the remaining principal balance. 53 00:04:42,950 --> 00:04:49,130 And the last payment that you make of fourteen thousand two hundred eleven will have to part interest 54 00:04:49,130 --> 00:04:52,940 will be only three thousand six hundred fifty six, which is 10 percent of the balance. 55 00:04:53,480 --> 00:04:56,900 And the remaining is the principal balance from last year. 56 00:04:57,620 --> 00:05:04,310 So at the end of the third year, the principal will be completely paid along with the interest, what, 57 00:05:04,310 --> 00:05:04,940 three years? 58 00:05:06,730 --> 00:05:09,230 So this is the concept of loan repayment. 59 00:05:11,080 --> 00:05:13,780 You have four main values here. 60 00:05:14,560 --> 00:05:16,960 The first is principal amount that you have taken. 61 00:05:18,150 --> 00:05:25,350 Second is the rate of interest that is being charged on that loan to reduce the number of payments you 62 00:05:25,350 --> 00:05:26,010 will be making. 63 00:05:27,470 --> 00:05:32,360 And the is the amount of payment that you will be making in each item. 64 00:05:34,120 --> 00:05:37,920 Now, let us go to our software tool and see how this is implemented.