How to Calculate Payoff and Debt Reduction

If you have a debt, the payoff as well as debt reduction can be calculated if you have all of the terms and conditions of the loan. The number of days in the billing cycle or the number of days between payments will help with your calculations. Each day your debt is outstanding, interest will accrue. When you pay off a debt before the loan term, you save money in finance charges.

Instructions

1

Gather all of the terms and conditions of your loan. The interest rate and balance will be needed to calculate debt reduction and/or a payoff on your loan. The higher the interest rate, the more you accrue in finance charges day to day. If you have a six-year loan in the amount of $15,000 with an interest rate of 8 percent and monthly payments of $263, you can calculate debt reduction.

2

Calculate debt reduction. If you sign papers for a loan on July 1 and your first payment is due on Aug. 1, and it's paid on Aug. 1, your debt reduction will be $163.01. Using the example, take the .08 interest rate, or 8 percent of $15,000, which is $1,200. Divide that by 360. These calculations always assume each month has 30 days for simplicity. That gives you $3.33. Then multiply the result times 30 days -- the number of days in the billing cycle. That gives you the amount of interest paid, which is $99.99. Subtract the interest from the payment to get debt reduction -- $263 $99.99 = $163.01. The new balance is $14,836.99.

3

Perform the payoff calculation. You can determine how much is needed to pay off the entire balance using the number of days between payments instead of the 30 days in the billing cycle. For example, if you decide to pay off your loan on Aug. 20, the following calculation will help you find the payoff. Apply the 8 percent interest rate to $14,836.99 and multiply that number by .08. Divide that by 360 days. Then multiply by 19, the number of days from the last payment until the payoff date.

4

Find the payoff figure. Your interest from the previous calculation is $62.65. Add the amount of your interest to the outstanding balance of $14,836.99 to get the payoff of $14,899.64. If you are mailing your payment on Aug. 20, add three or four days of additional interest to account for mail time. Take $62.65 and divide it by 19 to find that interest is accruing daily at a rate of $3.30 based on the balance of $14,836.99. Therefore, four days of interest will be $13.20. This amount should be added to your payoff.