When you borrow from a bank or other lender, you usually arrange to repay the loan with interest by a specific date in a number of equal installments.
REPAYING IT EARLY
But after several payments, you may decide to repay the entire loan earlier than originally scheduled. You ask for a “payoff or payout” figure.
You may be disappointed to learn that the balance due is higher than you anticipated.
Why is it higher?
Perhaps because you thought the interest on the amount borrowed was divided evenly over the number of payments you agreed to make. Thus, you may have believed that if you paid the loan in 10 months instead of 30 you would owe only one-third as much interest.
This is not the way financial institutions compute interest, however.
Financier method of calculating rebate of a contracts interest charges all vary and is detailed within the fine print of the contract terms & conditions.
Sometimes this is not written in “plain english” and the definition sometimes refers to circumstances and charges that are not necessarily known to the borrower.
E.g. Break Costs, Early Payment Loss, Internal Funding Costs.