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

Page 2