A make-whole provision allows a borrower to pay off loan debt early by making a lump-sum payment to the lender. To find the value of this provision, you must estimate the net present value of the payments that would be made if the loan went to full term. Many times, the assumptions for this calculation will be explicit in the loan documents or can be assumed from the interest rate on the loan.
Gather the terms of your loan, including how much principle you have remaining, the interest rate and the the time left on the contract.
Use the interest rate on a loan as the interest rate for your make-whole provision. However, if you have a contract for monthly payments without an interest rate, you will need to assume a rate for the future cash flow. An industry standard for a medium risk rate is 10 percent.
Examine the formula for net present value (NPV). It will be used to make the calculation for the make-whole provision based on the outstanding funds to be paid. The formula is as follows:
NPV = R/(1+i)^t
Where R is the remaining principle payment , i is the interest rate and T is the time in years remaining.
Calculate the NPV as a way to determine the make-whole provision using your data. If we assume that the interest rate is 10n percent, the debt is $5,000 and three years are left, the calculation is as follows:
NPV = $5,000/(1+.1)^3 NPV = $3,756.57
Add any prepayment penalty to the NPV if it is in the contract. Otherwise, the make-whole provision in the example would be $3,756.57.
Josh Victor started writing in 2006 as an author for various blogs across the internet. His areas of expertise include finance, business, marketing and technology. He has a Bachelor of Arts in economics from the University of Illinois at Chicago.