Prepaid Interest Loan
A prepaid interest loan differs from a standard installment loan in the way that the interest payments are distributed. In Europe it is sometimes referred to as a German loan.
Contrary to a standard installment loan, the interest portion is paid in advance, resulting in two kinds of payment:
- a first payment which covers the interest for the first period, and
- successive payments with both a principal portion and a (prepaid) interest portion.
Note: in the last payment - which is equal to the other payments - the interest portion is zero since interest has already been included in the one but last payment.
This forward shift in interest
portions is best observed by taking a look at the amortization schedule for
such a loan.
To see the amortization schedule, select the Show Details command in the Calculation menu.
To toggle between date and year/period view, click the first column header in the Details.
To change the start date, select the Start Date command in the Edit menu to open the Date Options dialog.
Input
| • nominal annual rate |
| • compounding frequency |
| • payment frequency |
| • number of years or payments |
| • loan amount |
Results
| • first payment |
| • successive payments |
| • total paid |
| • total interest |
Examples
| • | A debt of $10,000 with interest at 6 % compounded monthly is paid off using monthly payments and a prepaid interest amortization schedule. What is the total interest?
Answer: $3,305.93. |
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| • | Using the same data, what would be the total interest charge for a standard loan? Just switch to the Installment Loan calculation and look up the Total interest result. Answer: $3,322.46. |
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| • | Using the same data, what would be the total interest charge for a fixed principal loan? Just switch to the Fixed Principal Loan calculation and look up the Total interest result. Answer: $3,025. |
Related topics
| Nominal annual rate |
| Compound interest |
| Installment Loan |
| Rule of 78 Loan |
| Balloon Payment Loan |
| Interest Only Loan |
| Fixed Principal Loan |
| Sinking Fund Loan |
| Extra Principal Payments Loan |