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### Instructions and Help about Form 2220 Installment

Welcome to a lesson on the loan formula this lesson is about conventional loans also called amortized loans or installment loans examples include auto loans and home mortgages the techniques in this lesson do not apply to payday loans add-on loans or other loan types where the interest is calculated upfront though I do have lessons on these topics one great thing about loans is that we can use the same formula as a payout annuity to see why imagine that you had \$10,000 invested at a bank you start taking out withdrawals while earning interest on the remaining balance as part of a payout annuity after five years your balance is zero flip that around and imagine that you borrow \$10,000 from a bank you make payments back to the bank with interest for the money you borrow after five years the loan is paid off the roles are rehere but the formula to describe the situation is the same so here is the loan formula which again is the same as the payout annuity formula where P Sub Zero is the loan amount or beginning balance or principal D is the loan payment or the payment per unit of time r is the annual interest rate expressed as a decimal K is a number of compounding periods in one year notice K appears three times in the formula and n is the length of the loan in years now the compounding frequency is not always explicitly given but can be determined by how often payments are made before we take a look at two examples though it is important to be very careful about rounding when calculations involve exponents in general keep as many decimals during calculations as you can be sure to keep at least three significant...

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