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7. Finance charge and APR calculations - The declining-balancemethod With the declining-balance method for calculating the APR on an installment loan, the interest assessed during each payment period is based on the current outstanding balance of the loan. The lender initially calculates a schedule to have the balance repaid in full after a certain number of months. The borrower may vary the repayment rate by making payments larger than those scheduled, and the borrower can repay the loan in full at any time. portion of the Each month, a portion of the repayment is dedicated to the principal and a portion to the interest. This method repayment, in which payment goes to pay interest and part goes to repay the principal, is called amortization. . The following table is a sample repayment schedule for a loan with $2,000 plus interest, using the declining-balance method at an interest rate of 1.5% per month: Month 1 Outstanding Balance Payment Interest Principal Ending Balance $2,000.00 $183.36 $ $30.00 $153.36 $1,846.64 1,846.64 183.36 27.70 155.66 1,690.98 2 3 1,690.98 183.36 25.36 158.00 1,532.98 4 183.36 22.99 160.37 1,372.62 1,532.98 1,372.62 5 183.36 20.59 162.77 1,209.85 6 18.15 165.21 1,209.85 1,044.64 183.36 183.36 1,044.64 876.95 7 7 15.67 167.69 8 876.95 183.36 13.15 170.21 706.74 9 706.74 183.36 10.60 172.76 533.98 10 533.98 183.36 8.01 175.35 358.63 11 358.63 183.36 5.38 177.98 180.65 12 180.65 183.36 2.71 180.65 0.00 In month 6, the payment amount is $183.36. Of this payment amount, $ pays interest, and $ repays the principal. You can see from this sample repayment schedule that the repayment amount generally remains the same from month to month. However, as the months progress, a percentage of the payment pays interest, and a percentage repays the principal

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