How do I determine my Cost of Loan from paying a loan off early, or,
Assumption: No charges for early payments.
Let's say I have a $25,000 vehicle loan and 1.99% APR over 5 years (60 months). Here I would pay $1,285 in interest.
Assuming monthly payments at the beginning of the month, how would I calculate my Cost of Loan if I paid the vehicle off in 3 years, but it was a 5 year term. Paying a total of $774 in interest.
I think the other two are over complicating it. They are correct that the interest rate doesn't change, but like you've already figured out the amount of interest paid through the life of the loan does.
$1,285/$25,000 = 5.14%
$774/$25,000 = 3.10%
This is your cost for the loan.
Expanding on the correct comment of @keshlam:
You borrowed $25000 at some point in time. This debt grew at the pre-agreed interest rate for one month.
At that point you threw some money into the debt. This amount (one hopes) paid off all the month's accumulated interest and some of the principle. The now-reduced total debt grew for another month at the same rate, at which time you threw some more money at the debt, and so on...
Now, as it happens, someone figured out that if you paid a particular amount each month, the debt, growing and shrinking under this payment scheme, would be reduced to zero immediately after the 60th payment, and you agreed to make that payment. You can see this in any amortization schedule for a loan or mortgage.
if you have favourable terms in the loan agreement, you could pay more each month, or even pay the entire balance owing. None of this would change the interest rate that was used to make the debt grow for the months up until the moment of that early pay-off!
You paid the exact same interest rate. You paid it for a shorter time, or on a lower balance than expected, but the rate used is exactly the same.
