GENERAL MATHEMATICS

Chapter 2: Basic Business Mathematics

LEARNING COMPETENCIES

The learner should be able to:

1. illustrate business and consumer loans;
2. distinguish between business and consumer loans;
3. solve problems involving business and consumer loans.

P21 Learning Skills: Critical Thinking, Comprehensive Reading, Skills in Problem-Solving

Pre – Assessment
BACKGROUND CHECK! Before we proceed to the lesson proper, I think it would be interesting to know
about your idea regarding business and consumer loans. To start off, what do you think is the difference between a
business and a consumer loan? Feel free to express your thoughts!

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LEARNING OUTPUTS
LO1: Clear understanding of the key concepts expressed through an essay.
LO2: Solved problems involving business and consumer loans.

TIME ALLOTMENT
180 minutes (3 hours)

Lesson 3: Business and Consumer Loans

About the Lesson

In this lesson, we will learn about the fundamental difference between a business and consumer loan, what
distinguishes amortization method from sinking fund method, and which of the two methods is more convenient to
use. Also, we will learn about the formulas that are used to calculate the values of the variables in each category and
apply them as we solve word problems.

Introduction
 GENERAL MATHEMATICS

A loan is a debt provided by one entity (an individual or an organization) to another entity at an interest rate.
It is a specific amount of money that is borrowed and can be repaid through a one-time payment or a series of
payments.

A consumer loan is when an individual borrows secured or unsecured funds or money from a
lender. Consumer loan includes credit cards, mortgages, home equity lines of credit, refinances, auto loans,
student loans, as well as personal loans.

Consumer loans are provided to individuals for such critical circumstances which may occur at occasions
such as when all of sudden, you need cash but you don’t want to borrow from your relatives or when emergencies
happen and you are in immediate need of a huge amount of money. It may also be for the purpose of your personal
needs and leisure.

A business loan, on the other hand, is a loan particularly meant for business reasons or purposes. Similar to
other loans, it entails the generation of a debt wherein it will be paid back together with interest. Business
loan includes microloans, invoice financing, mezzanine financing, bank loans, asset-based financing, cash
flow loans, as well as business cash advances.

The way businesses borrow funds to finance the operation cost or expense of their business is basically
different from the way consumers borrow funds to be able to make purchases or pay off unexpected bills.

 Collateral or Asset
Typically, both consumer loans and business loans need collateral, also called assets, for the
purpose of securing or protecting the loan. The collateral for both loans may include investments or real
estate. 

Moreover, a business loan may possibly be collateralized by furniture and fixtures, equipment or
inventory. Besides safeguarding the business assets, a business loan may demand the owner of the
business to also make their personal assets available.

 Loan Guarantor
A guarantor is an individual who makes it sure that the borrower will pay back the money
borrowed. Usually, a consumer loan doesn’t require a guarantor to be able to take out a loan. In the event
that the loan isn’t settled by the borrower on the agreed schedule, the bank or the lender could legally go
after the guarantor who signed the loan for payment. 
For a business, when they apply for a loan, the business owners typically need to sign themselves
as guarantors. By doing so, their personal assets as well as their business assets are placed at risk.

 Documentation
Frequently, a consumer loan will necessitate pay stubs, a credit report, or tax returns. For
business loans, the business’ credit reports will be evaluated. Furthermore, businesses taking out  a
business loan will be obligated to supply financial statements for the last three years. Financial
 GENERAL MATHEMATICS

institutions oftentimes need these financial statements to be compiled and documented by a certified
accountant.

Additionally, tax returns as well as duplicates of contracts with suppliers, merchant and
customers may be a requirement as well. Generally, the needed documentations for a business loan to be
granted transcend what is necessitated for a consumer loan.

 Payment Terms
Typically, business loans have a term that is shorter with the inclusion of a greater interest rate
compared to a consumer loan. At times, this could depend on how long a business has operated and the
available quantity of collateral for the loan. If an inventory is the only thing that secures a business loan,
the loan will have a shorter term and will have an interest rate that’s higher compared to a business loan
wherein it is secured by an asset that’s of more value such as real estate. 

Furthermore, certain business loans are callable loans wherein banking institutions are at a
particular time permitted to call the loan due.  If the loan is called due, it is a must for the borrower to
settle the full remaining loan amount.

Opening Activity – ENGAGE 1: LET’S TEST YOUR UNDERSTANDING

To check if you did really understand the discussion above, identify whether the following is a consumer or
business loan.

1. Mr. Cerezo plans to have a barber shop. He wants to borrow some money from the bank in order for him
to buy the equipment and furniture for the barbershop.
Answer: _______________

2. Mr. and Mrs. Smith want to borrow money from the bank to finance the college education of their son.
Answer: _______________

3. Mr. Swayze wants to have some improvements on their 10-year old house. He wants to build a new room
for their 13-year old daughter. He will borrow some money from the bank to finance this plan.
Answer: _______________

4. Mr. Jon owns a siomai food cart business. He wants to put another food cart on a new mall in the other
city. He decided to have a loan to establish the new business.
Answer: _______________

5. Reese has a computer shop. She owns 6 computers. She decided to borrow some money from the bank to
buy 10 more computers.
Answer: _______________

EXPLORE

 Payment of Debts by Amortization

 GENERAL MATHEMATICS

Amortization is paying off a debt or loan in regular installments over a

specific period of time. Amortization follows an amortization schedule where the
number of needed payments, payment for each period, payment on principal and
interest, and balance of loan are reflected.

Definition of Terms

 Amortization of loan – is the repayment of a loan by making periodic payment or installments.

 Amortization Schedule – table showing the periods of payment, the principal part and interest part of
those payments, and the outstanding balance after each payment is made.

To construct an amortization schedule, follow these steps: (You may refer to the amortization
schedule on Example 1.)

1. Solve for the periodic payment ( R).

2. Prepare the table with the indicated column headings and (n+1) rows.
3. A. Place the original debt on the 0 th row under “Outstanding Balance.” Then place
the periodic payment ( R) on the 1st to last row under “R.”
B. Get the interest payment ( I ) for the first period by multiplying original debt by

the interest rate per period ( mj ).

C. Subtract I from the regular payment ( R) to get the payment on principal
repayment for the first period.
D. Deduct the payment on principal from the debt to get the balance of the loan at
the end of first period.
 AmortizationE.period – isfor
Repeat thethe
length
otherofrows
timeuntil
over your
which a loan
reach theisfinal
to beperiod.
fully paid off. of 0 at the
A balance
end of the term indicates that the debt is completely paid.
 Outstanding Balance (OB) – this refers to the remaining or current balance on a loan, at a particular
date. It is the amount that the borrower needs to pay if he wants to pay the debt in full even before the last
payment. It can be solved by subtracting the future value of a debt after a certain number of periods and
maturity value of the payments made.

 Final Irregular Payment (X) – the last periodic payment usually smaller than the regular payment and
made one period after the last regular payment is made.

 Interest (I) – interest earned on the nth payment date.

 Repayment to the Principal (RP) – amount that is a part of R that goes to the payment of the principal.

Formulas

( 1+i )n−1
OB=P ( 1+ i )n −R [ i ]
– Retrospective Method
 GENERAL MATHEMATICS

where:
P = principal or the loan
i = interest rate per period ( mj )
R = periodic payment
n = number of payments made

1−( 1+i )−(n− p )

OB=R [ i ] – Prospective Method

where:
R = periodic payment
i = interest rate per period ( mj )
n = original number of periods
p = number of payments made
(n> p)

i
R=A
[ 1−( 1+ i ) ]
−n – Ordinary Annuity Formula

where:
R = periodic payment
A = present value of the loan
i = interest rate per period ( mj )
n = number of payments made
t = time in years

I n=OB n−1 x i

RPn=R−I n

R=I n + RP n

Final Irregular Payment = OB n (1+i)

where: n = last regular payment date

Px i
log (1−
)
R
n=
−log(1+i)

The outstanding loan balance can be determined in two ways:

Retrospectively - The retrospective method is backward looking. The outstanding loan

balance is the original amount of the loan accumulated to the present date minus the
accumulated value of all the loan payments that have already been paid.
 GENERAL MATHEMATICS

Example 1:

A loan of 8 quarterly payment of Php 10 500 is to be made to pay for a loan at 14% compounded quarterly.
Determine/Show

a. the value of the loan

b. the outstanding balance after 1 year
c. the interest on the 6th quarter
d. the repayment to the principal on the 6th payment
e. the total interest earned
f. the final irregular payment
g. the amortization schedule

 Solution:

Given:

R = Php 10 500 m = 4 (compounded quarterly) n=8

j
j = 0.14 i ( ) = 0.035
m

a. Amount of loan

1−( 1+ i )−n
A=R [ i ]
1−( 1+0.035 )−8
A=Php10 500 [ 0.035 ]
Amount of loan=Php72 176.53

b. Outstanding balance after 1 year. [OB 4 ¿

1− (1+i )−(n−4)
OB 4=R [ i ]
 GENERAL MATHEMATICS

Note: p = 4 since what is asked is the OB after 1 year. In a year, there are four quarters; therefore, payments
have been given 4 times.

1−( 1+ 0.035 )−(8 −4)

OB 4=Php 10 500 [ 0.035 ]
OB 4=Php 38 567.33

c. Interest on the 6th quarter [ I 6]

I 6=OB 6−1 x i

¿ OB 5 x i

1−( 1+0.035 )−(8−5)

OB 5=Php 10500 [ 0.035 ]
= Php 29 417.1883

I 6=Php 29 417.1883 x 0.035

I 6=Php 1029.60

d. Repayment to the principal on the 6th payment [ RP 6 ¿

RP 6=R−I 6

¿ Php10 500−Php1 029.60

RP 6=P hp 9 470.40

e. Total Interest Earned [ I t ¿

I T = ( R x 8 )− A

¿ ( Php10 500 x 8 )−Php72 176.53

I T =Php 11823.47

f. Final Irregular Payment (x)

x=OB 8 (1+i)
 GENERAL MATHEMATICS

There’s no need for a final payment because all the payments are REGULAR. If you solve for OB n
(last regular payment date), OB n is found to be zero. No outstanding balance, therefore no need for final
payment.

g. Amortization Schedule

Interest/Period Repayment to the Outstanding

Periods R
(In) Principal (RPn) Balance (OBn)

0 - - - Php 72 176.53
1 Php 10 500 Php 2 526.18 Php 7 973.82 64 202.71
2 10 500 2 247.09 8 252.91 55 949.80
3 10 500 1 958.24 8 541.76 47 408.04
4 10 500 1 659.28 8 840.72 38 567.32
5 10 500 1 349.86 9 150.14 29 417.18
6 10 500 1 029.60 9 470.40 19 946.78
7 10 500 698.14 9 801.86 10 144.92
8 10 500 355.07 10 144.93 0.00
Total Php 84 000 Php 80 126.32 Php 72 176.53

Example 2:

A Php 60 000 debt is to be repaid with installments of Php 10 000 every 6 months. If the interest charged is
15% compounded semi-annually,

a. How many regular payments are needed?

b. What additional payment is required if made on the same date as the last regular payment date?
c. What is the size of the final irregular payment?
d. What is the outstanding balance after 18 months?
e. Construct an amortization schedule.
 Solution:

Given:

P = Php 60 000 R = Php 10 000 m = 2 (compounded semi-annually)

j
j = 0.15 i( ) = 0.075
m

a. No. of regular payments

Pxi
log (1−
)
R
n=
−log(1+i)
 GENERAL MATHEMATICS

Php 60000 x 0.075

n=
(
log 1−
Php 10 000 )
−log ( 1+0.075 )

n=8.266475827

No. of regular payments = 8 (semi-annual payments)

b. Additional Payment [OB 5]

( 1+0.075 )5−1
OB 5=Php 60 000 ( 1+0.075 ) −Php10 0005
0.075 [ ]
– Retrospective Method

¿ Php 86 137.76−Php 58 083.91

OB 5=Php 28 053.85

c. Final Irregular Payment (X)

X =OB 5( 1+ i)

X =Php28 053.85 ( 1+0.075 )

X =Php30 157.89

d. OB after 18 months [OB 3 ¿

1−( 1+i )−(n− p )

OB 3=R [ i ]– Prospective Method

1− (1+ 0.075 )−(8.266475827−3)

OB 3=Php 10000 [ 0.075 ]
OB 3=Php 42 231.56

e. Amortization Schedule

Interest/Period Repayment to the Outstanding

Periods R
(In) Principal (RPn) Balance (OBn)

0 Php 60 000
1 Php 10 000 Php 4 500.00 Php 5 500.00 54 500.00
 GENERAL MATHEMATICS

2 10 000 4 087.50 5 912.50 48 587.50

3 10 000 3 644.06 6 355.94 42 231.56
4 10 000 3 167.37 6 832.63 35 398.93
5 10 000 2 654.92 7 345.08 28 053.85
6 30 157.89 2 104.04 28 053.85 0.00
Total Php 80 157.89 Php 20 157.89 Php 60 000.00

ELABORATE

To check your understanding of the lesson, work on the given problems below. Use the space
provided for your solution. Box your final answer. Round the final answer to the nearest hundredths.

Enrichment Exercise 1:

1. Mrs. Puff borrowed some money from a bank that offers an interest rate of 12% compounded monthly.
Her monthly amortization for 5 years is Php 11 122.22. How much is the outstanding balance after the
12th payment?

2. Mr. Krabs is considering to pay his outstanding balance after 3 years of payment. The original amount of
the loan is Php 100 000 payable annually in 5 years. If the interest rate is 10% per annum and the regular
payment is Php 26 379.75 annually, how much is the outstanding balance after the 3rd payment?

3. A newly married couple decided to buy a brand new car. The net amount of the loan is Php 500 000.
They plan to amortize the loan in monthly installments for 3 years. If money is worth 12% convertible
monthly,

a. How much is the monthly installment?

 GENERAL MATHEMATICS

b. How much is the outstanding balance after the second payment?

c. How much of the third payment goes to pay the interest and the principal?

4. Construct an amortization schedule of a loan of Php 5 000 to be repaid over 6 years with a 6-payment
annuity-immediate at effective rate of interest of 6% per year.

 Payment of Debts by Sinking fund (SF) Method

Sinking Fund – systematic means of accumulating funds by making

periodic deposits (usually equal in amount, with the exception of the last that
will equal the desired sum of money at the time it is needed.

Definition of Terms

 Sinking Fund – fund created by making periodic deposits for future needs.

 Sinking Fund Method – in this method, the debtor pays interest periodically and the principal in one
lump-sum payment at the end of the term. The interest and principal are paid separately. Usually, the
sinking fund deposit and the interest on the loan are made at the same time, unless otherwise stated.

 Sinking Fund Schedule – table showing the periods of deposit, the principal part and interest part of
those deposits, and the sinking fund balance after each deposit is made.

To construct a sinking fund schedule, follow these steps: (You may refer to the sinking fund
schedule on Example 1.)

1. Solve for the value of the regular deposit ( R).

 GENERAL MATHEMATICS

 Interest on the fund (I) – interest earned periodically by the regular deposit.

 Increase in the fund (INC) – sum of the regular deposit, the interest earned on that period and the
amount at the beginning of the period.

Formulas

Sxi
log( +1)
R
n=
log (1+i)

where:
S = sinking fund

i = interest rate per period ( mj )

R = periodic payment
n = number of deposits made

(1+ i)n−1
S=R [ i ]
where:
S = sinking fund
i = interest rate per period ( mj )
R = periodic payment
n = number of deposits made
 GENERAL MATHEMATICS

S xi
R=
(1+ i)n−1

I n=Sn−1 x i

INC n=R+ I n

Additional Deposit: S−S n

Final Irregular Deposit: S−S n (1+i)

Example 1:

A Php 42 600 fund is to be created by making regular deposits of Php 4 300 at the end of each month in a
bank that pays interest at 15% compounded quarterly.

a. How many regular deposits are needed?

b. How much is in the fund after 3 months?
c. What additional deposit is needed if made on the same date as the last regular deposit?
d. What is the size of the final irregular deposit ?
e. What is the increase in the fund on the 5th month?
f. Construct a sinking fund (SF) schedule.
 Solution:

Given:

S = Php 42 600 R = Php 4 300 m = 4 (compounded quarterly)

j
j = 0.15 i ( ) = 0.0375
m

a. No. of regular deposits

Sxi
log(
+1)
R
n=
log (1+i)

Php 42 600 x 0.0375

log( +1)
Php 4 300
n= =8.581347863
log (1+0.0375)

No. of regular deposits = 8

 GENERAL MATHEMATICS

b. Amount in the fund after 3 months [S ¿¿ 3]¿

( 1+ i)n−1
S3=R [ i ]
(1+0.0375)3−1
¿ Php 4 300 [ 0.0375 ]
S3=Php 13 389.80

c. Additional deposit

Additional Deposit=S−S n = S−S 5

(1+ 0.0375)8−1
¿ Php 42 600−Php 4 300 [ 0.0375 ]
¿ Php 42 600−Php 39269.98

Additional Deposit=Php 3 330.02

d. Final Deposit

Final Deposit =S−Sn (1+i)

¿ Php 42 600−S8 (1+0.0375)

¿ Php 42 600−Php 39269.98 ( 1+0.0375 )

Final Deposit =Php 1 857.40

e. Increase in the fund on the 5th month [INC ¿¿ 5]¿

INC5 =R+ I 5

¿ Php1 000+ S5 −1 x i

( 1+ 0.0375) 4−1
¿ Php 4 300+ Php 4 300 [ 0.0375 ]
x 0.0375

INC5 =Php 4 982.20

f. Sinking Fund Schedule

 GENERAL MATHEMATICS

Amount at the Interest Earned Regular Deposit Amount at the

Periods
Beginning (I) (R) End (S)
1 - - Php 4 300 Php 4 300
2 Php 4 300 161.25 4300 8 761.25
3 8 761.25 328.55 4300 13 389.80
4 13 389.80 502.12 4300 18 191.91
5 18 191.91 682.20 4300 23 174.11
6 23 174.11 869.03 4300 28 343.14
7 28 343.14 1 062.87 4300 33 706.01
8 33 706.01 1 263.98 4300 39 269.98
9 Php 39 269.98 Php 1 472.62 Php 1 857.4 Php 42 600

ELABORATE

To check your understanding of the lesson, work on the given problems below. Use the space
provided for your solution. Box your final answer. Round the final answer to the nearest hundredths.

Enrichment Exercise 2:

1. Suppose you deposit Php 900 per month into an account that pays 4.8% interest, compounded monthly.
How much money will you have after 9 months?

2. Mr. Lim wants to set up an education account for his only son and wants to have Php 75 000 after 15
years. He finds an account that pays 5.6% interest, compounded semi-annually, and he would like to
deposit money in the account every six months. How large must each deposit be in order to reach his
goal?
 GENERAL MATHEMATICS

3. Construct a sinking fund schedule for the loan in Enrichment Exercise 1, No. 4.

 Comparison of Amortization and Sinking Fund Methods in Payment of Debts

1. Amortization Method – each periodic payment includes the interest due and part of the principal. The
principal is gradually reduced over the term.
- In practice, most people prefer the amortization method in setting their debts because they make
only a single payment (R) each period to pay the principal and the interest.
2. Sinking Fund Method – the interest is paid periodically but the principal remains unpaid until the end of the
term. The principal is paid in lump sum when the sinking fund becomes equal to the principal.
- This method causes inconvenience to the debtor because the debtor has to make two separate
payments each period: one for the interest on the loan and the other, the periodic deposit (R) for
the sinking fund.

But since we are talking of business, the basis for the choice of method to be used is “COST”.
Whichever of these two methods has the cheaper periodic cost, that method should be used.

Formulas

Amortization Method:

Periodic Cost ( C )=R A (periodic payment )

P xi
R=
1−(1+i)−n

where:
P = principal or the loan
i = interest rate per period ( mj )
R = periodic payment
n = number of payments made
 GENERAL MATHEMATICS

Sinking Fund Method:

Periodic Cost ( C )=RSF + interest on loan(I )

S xi
R SF= n
(1+i) −1

where:
S = sinking fund

i = interest rate per period ( mj )

R = periodic contribution to the sinking fund
n = number of deposits made

I =S x i

Example 1:

A Php 12 000 debt is to be liquidated: interest included at 5% compounded annually by annual payments for
3 years. Find the periodic cost.

 Solution:

Given:

P = Php 12 000 m = 1 (compounded annually) t = 3 years j = 0.05

j
i( ) = 0.05 n=3
m
Method  Amortization

P xi
C=R=
1−(1+i)−n

Php 12 000 x 0.05

¿ =Php 4 406.50
1−(1+0.05)−3

Annual payment of Php 4 406.50 is needed to settle the debt of Php 12 000 for 3 years.

Example 2:
 GENERAL MATHEMATICS

A man borrows Php 36 000 for 18 months at an interest rate of 16% converted quarterly. He deposits every 3
months in a fund earning 14% converted quarterly so that he can repay his loan in one lump sum. Find the quarterly
cost of the loan.

 Solution:

Given:

S = Php 36 000 j1 = 0.16 j2 = 0.14

t = 1.5 years m1 = 4 m2 = 4
i1 = 0.04 i2 = 0.035

Method  Sinking Fund Method

I =S x i

¿ Php36 000 x 0.04

I =Php 1 440

S xi
R SF= n
(1+i) −1

Php 36 000 x 0.035

¿ 4
(1+0.035) −1

R SF =Php 8 541.04

C [quarterly cost ]=R SF +interest on loan( I )

¿ Php 8541.04 + Php1 440

C [ quarterly cost ] =Php 9 981.04

The debtor should make 2 separate payments: Php 1 440 payment for the interest and make a regular
deposit (R) of Php 8 541.04 quarterly for 18 months. Then withdraw the amount from the fund which is equal
to the loan of Php 36 000 and pay it in lump sum.
 GENERAL MATHEMATICS

Assessment
Activity 1
Business and Consumer Loans

Part I. Directions: Answer the following problems. Provide your answer with complete solution and box the
final answer for each question. Round your final answer to the nearest hundredths.

1. Gunther badly wants to have his own gaming set but his budget isn’t enough yet so he decided to get a loan
of 16 quarterly payment of Php 23 300 at 12% compounded quarterly. Determine/Show

a. the value of the loan

b. the outstanding balance after 2 years
c. the interest on the 10th quarter
d. the repayment to the principal on the 10th payment
e. the total interest earned
f. the amortization schedule
 GENERAL MATHEMATICS

2. A Php 17 750 fund is to be created by an individual making regular deposits of Php 925 at the end of each
month in a bank that pays interest at 13% compounded monthly.

a. How many regular deposits are needed?

b. How much is in the fund after 7 months?
c. What additional deposit is needed if made on the same date as the last regular deposit?
d. What is the size of the final irregular deposit ?
e. What is the increase in the fund on the 7th month?
f. Construct a sinking fund (SF) schedule.
 GENERAL MATHEMATICS

3. Rachelle’s family needs to borrow Php 1M to pay for the major operation and other hospital bills of his
brother. They can borrow Php 1M from Lender A at 10% effective for 5 years. To repay the debt at the end of
5 years a sinking fund is created at 9% compounded annually. Another Lender B offered to lend the money at
11% and permit the debt to be amortized with 5 annual payments. From whom should Rachelle’s family
borrow?
 GENERAL MATHEMATICS

Part II. Directions: Answer the question and provide a brief answer. Use your own words. Refer to your own
understanding.

Essay:

Based on what you have learned, how would you differentiate amortization method from sinking fund
method?
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