Introduction
Using the above definition of amortization, the thesis statement for this research paper can be defined (Nellen et al. 37). It will be based on investigating how buying a car involving a bank can be beneficial or disadvantageous based on acquiring a loan and how it will be repaid by taking a real life example. Moreover, a real bank shall be chosen with an arbitrary rate which the bank shall judge a debtor. In so doing, an analysis of numbers shall be computed to illustrate more on which decision to draw concerning taking a loan for the car.
Discussion
Consider an individual called Steve. His aim is to purchase the Ford Explorer. However, Steve may not have enough cash to purchase this car worth $ 30000. Steve will approach a renowned bank like Standard Chartered Bank for a loan. In that case the bank charges interest say yearly depending on the mode of agreement. Taking an illustration of 4% interest per annum. If the loan can be repaid monthly, and the total years to pay it say if it is spread over 2 years, then that sums up to 2*12 months that are 24 months.
In that case, the first principal sum can be computed from which the interest is computed per month. The interests will be added in a period of two years that will sum up to the total amount a debtor, Steve will pay the Bank. To find the Present Annual Equity, it will be computed using the formula, PMT= P*{r/12}/ (1-(1+r/12)-t*n}. This means that P=$30000, n=2 years, t is the total number of months in a year that are 12.
Calculation
For example, if the sum was borrowed on Jan 31, PMT= 30000*{4/12}/(1-(1+4/12)-12*4}.Which will translate to $= 30000{0.3333/(1-(1+0.3333)-24} = 45000*{0.3333/0.9989)=30000*0.3333= $ 10009. The Interest and the principal in the subsequent years will be added up together in order to find the next probable sum to be paid. Ideally, since the number of months is 24, it is easy to find the total sum paid. Since the PMT per moth is $15000, then in 24 months is will sum up to $10000*24= $ 240, 000. Ideally, the total interest to be paid will sum to 240000-30000= $210,000 in two-year time with an initial borrowing of $ 30000.
Using this data, Steve will be able to get the car but at the end of the day will pay a lot of interest to the Bank. Initially, if that was the agreement, then he will have to confine and pay. However, the payment is spread in 24 months and is not prompt.
Most individuals go through the same idea to pay for goods that in the first place will be expensive for them. They pay their debts via interests on the principal amount. It is just like while investing in a bank, an individual will always expect interest on the sum of money invested.
The interest above the principal money borrowed is the profit or a return for the bank (Swedberg and Richard 48). In a period of 2 years, Steve will have used the Ford-Explorer as he enjoys his utility from the services offered but keeping in mind that he will pay a lot of cash to the bank until he clears the bill that is when the car will be his in full, otherwise, the bank has a contractual capacity to get compensation id Steve does not obey the law by paying the interest in time.
Business transactions have benefits as well as losses. The benefits come about when the returns are positively experienced. On the contrary, it can happen that it goes a loss, and that counts for the cons. Besides, a business like those involving banks, they may be at risk. If the loaned dies, then the bank will have to write off the sum and hence constituting to a loss. In such cases, banks that do not have an insurance cover, will be running at losses, and in the long term, they may close down. On the other hand, some problems can as well occur for the banks. For instance, if they lend money with low rates, they will earn low sums. In that capacity, if the bank could lend Steve the sum at say, 1% interest, then it is automatic that the interest paid will not be equivalent to that at 4%.
What is more, banks can use this formula as a way of controlling inflation in the economy. Take the example of an individual borrowing excess money to circulate. If people do this event, then more cash will be availed in the economy resulting to not only unemployment, but also high inflations. In such a case, the government can issue a bank rate so that at high rates, banks will offer little loans for the car purchasing. Henceforth, people will fear borrowing money at very high rates, discourage it, and hence less amount will be availed. In that case, it becomes a factor of controlling inflation (Berlatsky and Noahn 15).
Conclusion
Ideally, when people do not have their cash at hand in full, then the best alternative is getting loans at some interest in order to carry on the transaction before them. The most important thing is that before borrowing of the loan, individuals should consider several factors as mentioned in the above discussion. In that case, knowing that business operations involve making losses, as well as profits, then Steve will never be disheartened in repaying the loan.
Works Cited
Berlatsky, Noah. Inflation. Detroit, MI: Greenhaven Press, 2013.
Fisanick, Christina. Debt. Detroit: Greenhaven Press, 2010. Print. P. 1-112
Nellen, Annette, and Kevin R. Conzelmann. Amortization of Intangibles. Arlington, VA: Tax Management, 2008. Continually updated resource. P. 12-78
Swedberg, Richard. Interest. Maidenhead: Open University Press, 2005. Internet resource. P. 10-117
