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November 1, 1999, Revised
February 21, 2005
Judging by my mail, for every
borrower who worries about how they are going to make their next payment,
there are 10 looking to repay early. Their personal strategies for doing
this, however, vary widely. Here is a sampling, with the loan details
omitted:
"I just took out a
loan�If I add $100 a month to the payment beginning immediately, can you
tell me when my loan will be paid off?"
"If I raise my
payment from $763.24 to $800, how much sooner will I pay off?"
"�I figure that my
bonus every December will allow me to pay $1,200 extra that month. If I do
this every year, when will I be out of debt?"
"We're stretched
right now, but in 2 years my wife will go back to work�and we will be
able to add $400 a month to our mortgage payment. Can you tell me when
this will pay off the loan in full?"
"We recently
inherited $45,000 from my father. If we use it to reduce the balance on
our loan, when will we get out of debt?
"�I promised by
daughter that if she took out a 15-year loan and made all the payments on
time, I would pay the balance remaining after 10 years. Can you tell me
how much that promise is going to cost me?"
With Charles
Freedenberg of DecisionAide Analytics, I have designed four Loan
Amortization and Early Payoff calculators that can answer these and
similar questions related to prepaying loans.
Calculator 2a is for borrowers who
want to know when their loan will
pay off, and how much interest they will save, if they make extra
voluntary payments in addition to their required monthly payment. This
calculator can be used to answer all the italicized questions posed above,
plus many more complicated variants such as multiple payment options of
any type. For example, it will generate the amortization schedule if you
make an extra payment of $100 every month starting in month 6, plus an
extra payment of $1500 every year starting in month 18, plus a single
payment of $12,000 in month 36.
Calculator 2b is for borrowers who want to know when their loan will pay
off, and how much interest they will save, if they shift to a biweekly
payment plan on which payments are applied monthly. Most biweekly plans are
of this type, including all those that use third parties. You can do this
with calculator 2a, since a biweekly plan is the equivalent of one
extra monthly payment every year beginning in the 12th
month. The biweekly calculator just makes it a little easier. The user can
make additional payments in the same way as with 2a.
Calculator 2bi is for borrowers who want to know when their loan will
pay off, and how much interest they will save, if they shift to a biweekly
payment plan on which payments are applied biweekly. The user can make extra
voluntary payments in addition to the required biweekly payment.With this calculator, the
extra payments are made at biweekly intervals rather than months, and the
amortization schedule runs in terms of biweekly intervals.
Calculator 2c is for borrowers who want to know how much extra they must
pay, above their required monthly payment, to pay off their loan within a
specified period. It provides the
same flexibility with regard to timing of payments and type of payments as
calculator 2a. For example, suppose you have a balance of $100,000
on a 7% loan with 336 months to run, and you want to pay off in 180 more
months. Here is a small sampling of some options that the calculator gives
you:
- Pay an extra $218 every month
starting in month 1.
- Pay an extra $271 every month
starting in month 24.
- Pay an extra $453 every other
month starting in month 4.
- Pay an extra $695 every quarter
starting in month 9.
- Pay an extra $1304 twice a year
starting in month 3.
- Pay an extra $2703 once a year
starting in month 12.
- Pay an extra $27,735 just once
in month 24.
Copyright Jack
Guttentag
2005 |
