Loan Prepayment Calculator: Calculation and Examples
Compare a regular repayment plan with extra monthly principal payments and an immediate lump sum.
Understanding the calculation
The original monthly payment is calculated from the remaining balance, rate, and remaining term. It stays unchanged after the lump sum, and extra monthly payments are added. This models a shorter payoff, not a lender recast that reduces the required installment.
Loan Prepayment formula
Apply the immediate lump sum to principal, then use the original payment plus the extra monthly amount. Compare interest and payoff time with the original schedule.
Worked example
At 0%, a $12,000 balance over 12 months has a $1,000 payment. An extra $500 per month repays it in eight months, saving four months but no interest.
Assumptions and interpretation
Repayment estimates use fixed interest and equal monthly periods. No fees, rate changes, new borrowing, missed payments, or penalties are added. Interest accrues on the remaining balance, and the last modeled payment is capped at the amount owed.
Displayed amounts are rounded; intermediate calculations use unrounded values. Compare the result with the terms and payment schedule in your agreement. For background on the calculation, read the CFPB explanation of principal and interest payments.
Frequently asked questions
What happens when the interest rate is zero?
No interest is added. Payments reduce principal directly, so a fixed term divides principal equally and a fixed payment determines how many months repayment takes.
Why might the actual result differ?
Payment timing, daily interest accrual, contract rounding, fees, and changing rates can differ from the monthly estimate. Check the lender or issuer’s agreement for the method used.
Does an extra payment lower the required installment?
This model holds the original payment fixed and shortens repayment. Reducing the required installment normally requires a separate recast or new agreement.