Lending Logic Lab Prepayment Penalty

Repaying a loan early saves interest, but some loans charge a prepayment penalty for it. Whether it pays to repay early comes down to one comparison: the interest you save against the penalty you pay. This estimator works out both, shows the net result, and tells you whether waiting for the penalty to end would be better. It applies to personal loans, mortgage refinancing, home equity loans and business loans.

How to use it

1. Enter your current balance, interest rate and the years left on the loan.
2. Enter how much you plan to repay early, and how the penalty is worked out in your loan agreement.
3. Read the net result, then the table for other repayment amounts.

Currency $ (US dollar)£ (British pound)€ (euro)₦ (Nigerian naira) Current loan balanceWhat you owe today. Interest rate (%)Your annual rate. Years left on the loanFor example 20 or 7.5. Amount you plan to repay earlyUse the full balance to clear the loan. Penalty-free amount allowedMany loans let you repay some each year without a penalty. Enter 0 if none. How the penalty is charged Percentage of the amount repaidMonths of interestFlat fee Penalty (% of the amount repaid)For example 2 for 2%. Months until the penalty endsEnter 0 if it lasts the whole loan.

How it is calculated

• Monthly payment: the standard repayment formula on your balance, using the rate ÷ 12 and the months left.
• Penalty applies only to the part of your repayment above the penalty-free amount. It is a percentage of that part, or that part × the rate ÷ 12 × the months of interest, or a flat fee.
• Interest saved: your normal payment continues on the smaller balance, so the loan ends sooner. The saving is the interest you would have paid, less the interest you will now pay.
• Net result = interest saved − penalty.
• Cost of waiting = the amount × rate ÷ 12 × the months until the penalty ends, compared with the penalty.

Assumptions and limits

• Fixed rate, equal monthly payments. After an early repayment you keep paying the same amount, so the loan ends sooner. Asking for a lower payment instead gives a smaller saving.
• Your agreement may calculate the penalty differently, for example on a declining scale or on the interest rate differential. Check the exact terms, then use the nearest option here.
• The money you use to repay early could earn something elsewhere. If it would earn more than your loan rate, repaying may not be the best use.
• Other early repayment fees, such as discharge or admin charges, are not included. Add them to a flat fee.
• The estimate for waiting ignores any change in rates or your plans during the wait.

General information only, not personalised advice. Results are estimates based on the assumptions listed above.