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US Rule For Partial Payments

This document outlines the steps to calculate interest on partial loan payments over time. It explains that interest is calculated on the outstanding principal balance from the last payment until the next payment. Partial payments are first used to pay accrued interest, with any remainder reducing the principal. The example shows a borrower making two partial payments on a $20,000 loan. Following the outlined steps, the total interest paid is calculated to be $518.86, saving $81.14 compared to paying no installments.

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13K views

US Rule For Partial Payments

This document outlines the steps to calculate interest on partial loan payments over time. It explains that interest is calculated on the outstanding principal balance from the last payment until the next payment. Partial payments are first used to pay accrued interest, with any remainder reducing the principal. The example shows a borrower making two partial payments on a $20,000 loan. Following the outlined steps, the total interest paid is calculated to be $518.86, saving $81.14 compared to paying no installments.

Uploaded by

Mary
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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US Rule for Partial Payments

Interest on a partial payment is calculated from the start of the loan to the time of the first payment. After the first payment interest is calculated on the time between the last payment and the next payment. Interest is added to the principle and then the partial payment is subtracted in order to get the adjusted balance for principle after each partial payment.

Example
Jane borrows $20,000 with an interest rate of 6% for 180 days. She makes partial payments on day 40 of $2,000 and on day 120 of $4,000.

The results are as follows: Interest: 1st partial payment: Interest: 2nd partial payment: Interest: Final payment: Total interest:

$133.33 First Adjusted principle: $241.78 Second Adjusted principle: $143.75 Final payment: $518.86

$18,133.33 $14,375.11 $14,518.86

The interest, if the principle balance is paid at the end of the loan, is: $20,000 X .06 X 180/360 = $600 The savings in interest, by making partial payments during the life of the loan, is: $600 - $518.86 = $81.14 Savings on interest Percentage of savings on interest payment cost is: $81.14 / 600 = .14 or 14%

Systematic Instruction on how to calculate the results


Step 1. Calculate the time between each payment.

Step 2. Multiply the principle times the interest rate times the partial time to determine the interest for the first payment. $20,000 X .06 X 40/360 = $133.33 Interest MJC Revised 1/2012 Page 1

US Rule for Partial Payments


Step 3. Add the interest to the principle. $20,000 + $133.33 = $20,133.33

Step 4. Subtract the partial payment to get the adjusted balance. $20,133.33 $2,000 = $18,133.33 Adjusted principle Step 5. Multiply the adjusted principle times the interest rate times the partial time to determine the interest for the second payment. $18,133.33 X .06 X 80/360 = $241.78 Interest Step 6. Add the interest to the adjusted principle. $18,133.33 + $241.78 = $18,375.11 Step 7. Subtract the partial payment to get the balance for the second adjusted principle. $18,375.11 - $4,000 = $14,375.11 Second adjusted principle Step 8. Interest on final payment. $14,375.11 X .06 X 60/360 = $143.75 Interest Step 9. Add the interest to the principle. The result is the final payment amount. $14,375.11 + $143.75 = $14,518.86 Final payment amount

MJC Revised 1/2012

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