Buying
Example Disclaimer. This example illustrates one application
of the method. The results shown here and the results in your situation
may differ. These differences occur for three reasons: (1) Laws
vary from state to state, (2) the computer programs used by lenders
differ, and (3) the contracts used by lenders differ. In the example,
the monthly interest is calculated as 1/12 of the annual interest.
Your finance agreement, even if it uses this method, may not work
like the one in this example. The example addresses the rebating
of interest only, not any other charges that may be included in
the loan. |
Example: Simple Interest Method
The Simple Interest method is similar to the Constant Yield (Actuarial)
method except that you may prepay principal amounts during the loan and
thereby reduce the outstanding balance and the interest portion of subsequent
payments. If you prepay a portion of the principal and continue to make
all required payments on time, you should receive either a notice that
your loan will be repaid earlier than scheduled or a rebate after your
last payment. (Note that the Simple Interest method may not give you the
same balance as the Constant Yield (Actuarial) method. Also note that
the Simple Interest method is not the same as the Daily Simple Interest
method.)
| Amount financed |
$18,800.00 |
| Term | 48 months |
| APR |
9.00% |
| Monthly payment | $467.84 |
| First payment interest |
= |
$18,800 × 9% ÷ 12 |
= |
$141.00 |
| First payment principal |
= |
$467.84 – $141.00 |
= |
$326.84 |
| End of month 1 loan balance |
= |
$18,800.00 – $326.84 |
= |
$18,473.16 |
| Second payment interest |
= |
$18,473.16 × 9% ÷ 12 |
= |
$138.55 |
| Second payment principal |
= |
$467.84 – $138.55 |
= |
$329.29 |
| End of month 2 loan balance |
= |
$18,473.16 – $329.29 |
= |
$18,143.87 |
| Full-term interest |
= |
($467.84 × 48) – $18,800 |
= |
$3,656.32 |
If an additional $1,000 principal is paid at the end of the first month, the
loan balance is reduced from $18,473.16 to $17,473.16. Month 2 interest
charges will be based on this reduced balance, so more principal will
be credited from each payment. If the remaining payments are made on time
or within the grace period, the loan will be repaid in 45 months rather
than 48 months because of the extra $1,000 principal payment in month
1. The total interest paid will be $3,224.84 instead of $3,656.32, a savings
of $431.48 in interest.
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