Debt Payoff Calculator

First, find out the present value of the outstanding balances on the multiple loans.

Next would be to find out the new installment amount, which could be either sum of the existing installment amount or additional payment, if any, to be made.

Now calculate the period within which the debt can be paid offis the present value of Outstanding Balance

Wherein,

• PV is the present value of Outstanding Balance
• L is the existing Payment
• L’ is the new Payment
• i is the rate of interest
• n is the frequency of payments
• nPVA is the number of periodical payments

It is a handy calculator as it will calculate the tenure when all the debts are paid off. In this case, the borrower can be sitting with multiple loans with different interest rates and is willing to consolidate them. Further, the borrower could even wish to increase the installment amount periodically or consolidate the installment amount. This shall help him reduce the interest burden and clear off debt early. The decision is not as easy as it is required to increase the installment amount, which could increase the borrower's cash flow burden. This calculator shall only help to calculate within what period they can pay off the debt entirely when the debts are consolidated.

One needs to follow the below steps to calculate the tenure of consolidated debt pays off.

Step #1 - First, the borrower needs to determine the current debt outstanding balance, which is nothing but finding out the present value of the Debt.

Step #2 - Now determine the new installment amount, which is the sum of the existing installment amount that he is currently paying and the additional amount that the borrower is thinking to start with.

Step #3 - Find out the loan which is higher interest-bearing and clear that the debt pays off first and continues paying minimum or installment amount for other outstanding loans.

Step #4 - Now calculate the outstanding principal on the remaining loans and the tenure of the loan with the new installment amount.

Step #5 - The resultant tenure can be converted into years by dividing the value arrived in step 4 by 12, and figures on the right side of the decimal can be multiplied by 12 to get them in months.

Mr. X has two outstanding loans one is an auto loan, and another one is a mortgage loan.

The details of both the loans are given below:

The Branch Manager has approached Mr. X with a scheme wherein he can consolidate outstanding loans and pay off debt early. The banker provided him scheme details to pay off the higher debt first and then continue the fixed amount of the secured loan to be repaid on the mortgage loan, which shall reduce his tenure of loan closure. Mr. X also agreed to increase the installment amount by $200 while consolidating the outstanding loans and will continue to do so until the debts are paid off.

You are required to calculate the tenure by which Debt shall be paid off.

Solution:

We need to calculate the present value of the current outstanding debt balance, which can be calculated per the below formula:

Auto Loan

Rate of interest applicable on monthly basis = 8 / 12 = 0.67%

The remaining period will be (7 * 12) – (3 * 12), which is 84 – 36, that is, 48.

• =$545. 52 * (1 – (1+0.67%)^-48)/ 0.67%)
• =$22,345.54

Mortgage Loan

Rate of interest applicable on monthly basis = 5 / 12 = 0.42%

The remaining period will be (25 * 12) – (10 * 12), which is 300 – 120, 180.

• = $1,227.64 *(1 – (1+0.42%)^-180 / 0.42%)
• = $155,241.51

Consolidated outstanding loan

• = $22,345.44 + $155,241.40
• = $177,586.84

We are given here that the existing monthly installment he is paying on an auto loan is $545.52, and the existing installment on a Mortgage loan is $1,227.64. The Consolidated installment amount would be $1,773.16, and Mr. X wants to increase this by $200. Therefore, the total new installment amount would be $1,973.16

First, the installment amount of the Auto loan would be paid off since its higher interest-bearing, and the new amount that would be used to pay off the auto loan would be $545.52+ $200, which is $745.52, and the rest amount will be used to pay off Mortgage loan which is $1,973.16 – $745.52 that equals to $1,227.64

Now, we shall calculate within what period will Auto loan be cleared off

• = ln (((1- 22,345.44 * (0.67%) / 745.52)^-1)/ ln (1+0.67%)
• = 33.55

Now outstanding tenure of the Mortgage loan would be 180 less 33.55, which is 146.45

Mortgage Loan After Auto Loan Is Paid Off

Rate of interest applicable on monthly basis = 5 / 12 = 0.42%

• = $1,227.64 * (1 – (1+0.42%)^-146.45 / 0.42%)
• = $134,374.99

Now, we shall calculate within what period the mortgage loan will be cleared off

• = ln (((1- 134,374.92 * (0.42%) / 1,973.16)^-1) / ln (1+0.42%)
• = 80.26

Therefore, the total tenure within which a loan can be cleared off is 33.55 + 80.26, 113.81, and when divided by 12, 9.48 years in 9 years and six months.