What Is Retained Interest?

Malcolm Tatum

Sometimes known as a payout penalty, retained interest is the amount of interest that is not yet paid on some sort of loan, but is projected to be paid out if the loan is not retired early. Depending on the policies and procedures of the lender, this amount may be added to the current principal due on the loan in order to determine how much the debtor would have to settle in order to pay off the loan as of the current date. This is particularly helpful in situations in which the configuration of the loan calls for settling a portion of the total interest due along with a portion of the principal with each of the scheduled monthly installment payments.

Man climbing a rope
Man climbing a rope

Calculating retained interest at any given point in the life of the loan allows debtors to know how much they would have to pay in a lump sum to settle the loan early. Typically, this amount will be less than if they simply continued to make payments according to the agreed-upon schedule and settled the loan on the appointed settlement date. At the same time, lenders will want to recover as much of the interest involved with the loan arrangement as possible, even with an early payoff involved. By calculating the retained interest, it is still possible to assess an equitable amount of interest while saving the debtor some money if he or she does choose to pay off the loan ahead of time.

One of the more common areas in which calculating returned interest is common is with mortgage loans. At any given point in time, the mortgage company can provide homeowners with a payoff amount for the loan, should they choose to settle the mortgage debt as of a certain date. For example, if a homeowner has ten more years on the current mortgage but wonders what the overall payoff would be if the debt were settled as of the last day of the current year, the lender could assess the principal still outstanding as of that date, apply the retained interest to that principal, and come up with a settlement figure for the client.

The amount of retained interest involved with early settlement of a loan will vary, based on banking laws and regulations that are in effect and on the policies and procedures utilized by the individual lender. In some cases, lenders will only apply a portion of the projected interest as retained interest when a client settles a loan early. Others will assess nearly the full amount of the interest that was amortized over the life of the loan, a situation that may limit the amount of benefit the debtor experiences from choosing to retire the debt ahead of time.

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