# Discount Calculation

### Introduction

#### Percentage

The Percentage method applies payments toward discount and principal in the same ratio of the total discount compared to total principal. In our example, $1,000 of discount is 10% of our$10,000 original principal balance.

$$\frac {1,000}{10,000} = 0.1$$

We can then compute the discount portion of a particular payment by multiplying the principal portion by 0.1. Looking at the previous example, we know the principal portion of the payment is $325.39. Let's confirm this by adding the principal and discount portions in the current example: $$292.85 + 32.54 = 325.39$$ If we multiply$325.39 by 0.01 we get $32.54—the discount portion of the current payment. One quirk of Percentage is that discount must be due on a loan before any money from payments will be applied towards it. In the above example, if a payment was made before the first payment actually came due on the loan, none of the payment would apply towards discount. The$32.54 would then come due as discount when the payment came due.

#### Percentage Fixed

Percentage Fixed works very similarly to percentage. The only difference is this: With Percentage, a payment made before the first due date will not apply anything towards discount—what would've gone to discount all goes to principal. With Percentage Fixed, however, payments made before the first due date will still put money toward discount.

#### Rebalancing

The Rebalancing option calculates a value as the unpaid discount divided by the remaining term of the loan.

In this case, since this is the first payment on the loan and the payment hasn’t come due yet, the unpaid discount can be calculated as the original discount of $1,000 divided by the 24-month term of the loan: $$\frac {1,000} {24} = 41.67$$ As you can see, the discount per period will be$41.67. This may change for future payments depending on whether the borrower pays on time or pays the full amount. It may be that you have a short first period as well.

#### Straight Line

The Straight Line calculation works similarly to Rebalancing; but with a Straight Line calculation, the discount and principal portions are calculated only once for the loan, and they don’t change based on payment schedule or how well the borrower repays the loan.

You’ll notice that the principal and interest portions of the first payment are exactly the same with the Rebalancing and Straight Line methods. The discount portion of the Straight Line payments won’t change until the final loan payment, and it only does so to ensure that the entirety of discount gets paid and no more.