If a reasonable estimate of a creditor’s loss arising from a full prepayment determined in accordance with the formula in subclause (1) is less than zero, then the reasonable estimate of that creditor’s loss arising from the full prepayment is zero.
Example
A debtor is advanced $5,000 under a fixed rate contract. The contract is for a term of 2 years. The annual interest rate for the whole term is 12%. Each of the 24 monthly payments is $235.37. 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 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 12 months is 10% (a 12-month fixed rate contract having an interest rate of 10% being closest in term to the 18-month unexpired portion of the term of the fixed rate contract that is to be fully prepaid). Applying the above formula, a reasonable estimate of the creditor’s loss arising from the full prepayment is calculated as follows:
LRE = $3,924.23 − $3,865.66 = $58.57
A reasonable estimate of the creditor’s loss is $58.57.
If, however, in the above example the interest rate for fixed term contracts offered by the creditor for a term of 12 months was 15%, then variables v and VFP would be:
LRE would then be calculated as follows:
LRE = $3,780.11 − $3,865.66 = − $85.55.
A reasonable estimate of the creditor’s loss in this case would be zero.
Note: For the purpose of this example only, calculations have been rounded to 9 decimal places.