This tool calculates the interest rebate on a loan when it is paid off early, using the sum of the digits method. It determines the portion of total interest that has not yet been earned by the lender, thus providing the borrower with the amount of unearned interest they are entitled to receive back. For example, if a loan is repaid halfway through its term, the calculation reveals how much of the total interest is refunded.
The significance of this calculation lies in its fairness. It provides a standardized method for determining unearned interest, ensuring transparency in lending practices. Historically, it offered a relatively simple way to approximate interest rebates before widespread computerization. While its use has declined due to greater computational power and alternative methods, understanding its principle provides insight into loan amortization and interest accrual.
