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Borrowing money over time
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
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THE SCENARIO
I've been thinking recently of how to help investors get started when they have a month-to-month surplus but haven't yet accumulated a pile of cash to buy a property, business, or other investment. The simplest way to handle it, of course, would be to just borrow money from a new investor at a rate that would leave them with a reasonably-sized pile at the end.
To make sure the lender is protected, I'd probably secure the loan against a piece of real estate or something else of value.
If I were to borrow $900 per month from an investor for 10 years, at 8% yield, how much would I owe them at the end of the 10 years?
THE SOLUTION
This one is a pretty straightforward time-value-of-money (TVM) calculation.
First things first, make sure the calculator is using 12 Payments per Year.
N: 120 (I'm borrowing monthly for 10 years)
I/YR: 8 (I'm borrowing at 8% interest)
PV: 0 (They don't start with any money)
PMT: 900 (I borrow $900 per month)
FV: (this is what I'm trying to find)
At the end of the 10 years, I'd owe my lender $164,651.43.
There are upsides and downsides to borrowing money with these kinds of terms, both for me and for the lender. I've been considering other ways of structuring such deals, and if you're interested in those, come back in future weeks, as I'll probably write about at least 2 or 3 more soon.
What do you think? Would you want to lend money like this? How about being on the borrowing side? Let us know in the comments below!
