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: Constant Yield (Actuarial) Method
The Constant Yield (Actuarial) method is similar to the Simple Interest
method except that to pay off the loan early, you may have to pay the
full remaining principal and interest (which is precomputed.) The lender
should then refund the unearned interest to you. (In some cases, the lender
may deduct the unearned interest from the amount you owe to reduce the
amount you must pay.) The other difference from the Simple Interest method
is that you do not reduce the outstanding balance and the interest portion
of subsequent payments by making extra monthly payments or unless you
pay off the full loan balance. (Note: The Constant Yield (Actuarial) method
may not give you the same net payoff as the 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 net 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 net loan balance |
= |
$18,473.16 – $329.29 |
= |
$18,143.87 |
| Full-term interest |
= |
($467.84 × 48) – $18,800 |
= |
$3,656.32 |
Additional payments do not reduce the loan balance in the month paid, so if
a $1,000 payment is made at the end of month 1, it is treated as prepayment
of the monthly payments due at the end of months 2 and 3. If the remaining
payments are made on time or within the grace period, there is no savings
of the full-term projected interest because the amount of interest in
each payment is precomputed. If there are no prepayments of principal
and the loan is prepaid after 24 payments, the balance will be the same
as the balance under the Simple Interest method but $54.81 lower than
the balance under the Rule of 78 method.
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