A debtor is advanced $5,000 under a fixed rate contract. The contract is for a term of 2 years. For the first year the interest rate is fixed at 12% and the 12 monthly payments are $235.37. For the remainder of the term a floating interest rate applies. Full prepayment of the contract is made after 6 months and 5 days (5 days since the last payment due date) when the unpaid balance is $3,865.66. At the date of full prepayment, the annual fixed interest rate that the creditor usually charges on a fixed rate contract of the same or a similar type as the fixed rate contract that is to be fully prepaid with a term of 6 months (6 months being the nearest term to the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid) is 10%. During the unexpired portion of the fixed interest period of the fixed rate contract that is to be fully prepaid, total payments of $1,412.22 would have been payable ($235.37 x 6 months), including total interest charges of $195.67. Applying the above formula, a reasonable estimate of the creditor's loss arising from the full prepayment is calculated as follows:
A reasonable estimate of the creditor's loss is $31.79.
Note: For the purpose of this example only, calculations have been rounded to 9 decimal places.