How to Calculate Early Payoff

If you come into a lump sum of money, you may want to consider paying off some of your accounts early. Paying off a loan or some other outstanding debt early can save you a substantial amount of money. When the account is paid off, you can use the money saved monthly for some other purpose such as investing or saving. You need to know the formula that helps you calculate an early payoff. If a loan is allowed to run its full term, you will pay the entire amount of finance charges owed.

Instructions

1

Find out the terms of your loan or account. You will need the balance, interest rate and day you intend to pay off your loan. Once you have all of these categories its just of matter of using the right formula. If your loan is set up for 60 payments and each payment is $350, you will have paid back a total of $21,000 after the last payment is made. This includes principal and interest. Paying off the loan prior to the 60th payment is technically an early payoff. The date of last payment will also be instrumental in helping with the calculation.

2

Calculate the lump-sum early payoff. If you have a balance of $20,000 and your rate of interest is 10 percent you can calculate an early payoff. First find out when the last payment on the account was made. Interest is paid up to the date of last payment. Take the interest rate of 10 percent and divide it by 360, then multiply this sum by the number of days from the last payment date to the payoff date. If the date of last payment is June 1 and you want to payoff the account on July 1, that would be 30 days. Take 30 days times .0002777 and then multiply by the balance of $20,000; the total equals $166.62. This is the amount of interest needed for 30 days. Add the interest to the balance of $20,000, and this gives you the payoff balance: $20,166.62.

3

Decide how you will pay your account off. If you mail your payoff balance, make sure you allow enough time for the payment to be received. Allowing five or six days for mailing time ensures your payment is received on time. In this example, your payment will need to be received by the payoff date of July 1--otherwise, it will not be a valid payoff. When you make a payment online or pay by phone you will not need as much time. In many cases your payment is credited the day it is received.

4

Use an early payoff calculator. A loan of $20,000 with an interest rate of 10 percent will have payments in the amount of $424.94 for a period of five years. If you decide you want to payoff the account early without making a large lump sum another method can be used. Enter all of the information about your loan into the payoff calculator. The amount of the loan, interest rate, the term of the loan and how many payments have already been made will be needed. Now enter the new loan term, which should be less than the original five years. If you use three years as the new term, the new payment will be $445.03. The loan will now be paid off in three years.