How Early Loan Prepayment Affects Internal Rate of Return

Summary

The document asks whether paying off a fixed-rate loan before its scheduled end changes its internal rate of return. The brief answer says the IRR remains the same and that only the loan's life changes. This conclusion depends on the prepayment amount and cash flows: if the borrower pays the outstanding balance implied by the original amortization and rate, shortening the schedule does not by itself change the rate earned on the payments made to that point.

The exchange offers no calculation, cash-flow schedule, or explanation of how prepayment penalties, fees, accrued interest, or a differently calculated payoff amount would affect realized returns. It also does not clarify whether the quoted rate is nominal or effective annualized. Readers should therefore treat the answer as a conditional principle for a consistently priced loan, rather than a general rule for every early repayment. The main lesson is that IRR depends on the amounts and timing of cash flows, not simply on the original stated loan term.

Key ideas

• IRR is determined by the timing and amounts of the loan's cash flows.
• Early repayment can leave the implied rate unchanged when the payoff follows the original amortization terms.
• Prepayment changes the loan's realized duration even if the rate is unchanged.
• Fees, penalties, or a different payoff calculation can alter the realized return.

Tags

# Question about IRR and early prepayment


# Question about IRR and early prepayment












Suppose I look at a 36 month loan for \$10,000 at 20%. Thus my payment per month is \$166.67. Thus my IRR should be 20% (on an annualized basis).

Now let's suppose I prepay my loan early at the end of 24 months. Doing the calculation, I still get the same IRR of 20%. Can someone confirm that this is in fact the case?

Thanks, Greg

## Answer by dm63 (score 1, accepted)

https://quant.stackexchange.com/a/35235

Yes, the IRR is the same regardless of the prepayment date. The only thing that varies is the life of the loan.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.