Can someone please clarify how to calculate the average life of a loan? Many thanks.
It seems to me there is no consistent approach and that it is a fairly useless measure. Some people calculate the loan based on the first drawdown, others on the first repayment or last drawdown. Two ways though: - divide each repayment by the total repayments. Multiply this by the number of years since your starting point and add. - divide the closing balance by the max balance and sum all of them.
Many thanks.
I will add that I’ve seen this “average life” term used in prepayment clauses in loan agreements in which the average life of the loan is determined, along with some other factors, to calculate breakage costs for prepaying early.
vnysot Wrote: ------------------------------------------------------- > I will add that I’ve seen this “average life” term > used in prepayment clauses in loan agreements in > which the average life of the loan is determined, > along with some other factors, to calculate > breakage costs for prepaying early. So have I. However, that doesn’t make it sensible. Ideally it should be contractually defined, but I don’t think I have seen this. Have you looked to see if it is defined. Incidentally, both methods above should give you the same answer which is a good check that you have done it correctly / I have described it correctly.