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  Dear
Dr. Don,
I have a bank loan for $4,325, which started
in January of 2000. I have paid $78.79 a month for 57 months out
of a 120-month loan plan. My APR states 21 percent. What should
I have paid to my loan and what should I have paid in interest?
I am told that I still owe $3,325 and that by paying $4,125 I will
be able to clear the loan by buying out the agreement. Is the math
correct?
-- James Juncture
 Dear
James,
The annual percentage rate is an estimate of the
effective interest rate on a loan when you consider fees and expenses
along with the interest rate of the loan. The nominal or stated rate
on the loan is used to calculate the monthly payment, not the APR.
The nominal rate on your loan is about 18.30 percent.
You can use Bankrate's
auto loan calculator to construct an amortization schedule for
your loan. It isn't to the penny because of rounding, but it does
show how the loan amortizes over time.
If there's no prepayment penalty
on your loan, then paying the loan balance is sufficient to pay
off the note. Since that's not the case, there has to be something
in your loan agreement that bumps the payoff up to the $4,125 number
the lender gave you.
I've run the numbers using Bankrate's
calculator, and have come across another discrepancy. According
to my calculation, the current loan balance at this time should
be about $3,082 rather than $3,325. The difference could be the
result of late payment charges.
In any case, the key here is to
review your loan documents to diagnose why the lender expects an
$800 bounty for you to pay off your loan early. That's equal to
about half of the remaining interest expense on the loan. If you
can't figure it out from the loan documents, then ask the lender
to explain it to you. You could be near the end of the prepayment
penalty period and save a ton of cash by waiting a few more months
before paying off or refinancing the loan.
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