See all five posts in this series

This post was inspired by a customer who asked us for some help solving a problem.  We asked him if it was okay with him if we did a Money Blog post about a situation like his, and he said that would be fine.  So here goes!

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(Part 2Part 3Part 4, and Part 5 come next)

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THE SCENARIO

I came across a note for sale.  The terms of the note are as follows:

Original balance: $6,000

Unpaid balance as of June 2: $4,560

Term: 5 years

Interest Rate: 0

Payments: $100 per month

If I buy it, make the purchase on June 2, and the first payment I’ll receive will be the July payment.

Every February, the borrower pays off $1,000 in order to accelerate the note paydown.


QUESTION

If the borrower continues to pay on his normal schedule (including the extra $1,000 every February), how much longer will he continue to owe the note’s owner anything?


SOLUTION

I’ll start receiving money in July.  That means that I’ll receive $100 for each of July through January (6 payments for a total of $600), then $1100 in Febuary, then $100 for each of March through January (11 payments for a total of $1,100), and so on.

So as of next January, the borrower will owe me $4,560 – $700 ($100 per month for 7 months) = $3,860.

After February, he’ll owe me $3,860 – $1,100 = $2,760.

As of the following January, he’ll owe $2,760 – $1,100 ($100 per month for 11 months) = $1,660.

After that Febuary, he’ll owe $1,660 – $1,100 = $560.

He’ll be all paid off six months after that.

Adding it up, I get 7 months + 1 month + 11 months + 1 month + 6 months = 26 months.

I’m decent at using a spreadsheet, so here’s how I set up the problem and solved it in Excel:

Money Blog – How discounted is that note really? Part 1
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