{{unreferenced, date=April 2019 Retained interest (also colloquially known as a ''payout penalty'') is future, currently unpaid,

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

that some lenders add to the remaining principal of a

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

to determine a payout figure in the event that the loan is terminated before the completion of the original

term Term may refer to: * Terminology, or term, a noun or compound word used in a specific context, in particular: **Technical term, part of the specialized vocabulary of a particular field, specifically: ***Scientific terminology, terms used by scient ...

. When two parties enter into a loan agreement, the amount of interest payable over the term of the loan is calculated and then

amortized In computer science, amortized analysis is a method for analyzing a given algorithm's complexity, or how much of a resource, especially time or memory, it takes to execute. The motivation for amortized analysis is that looking at the worst-case ...

across the loan repayments. Thus, each repayment can be considered to include two parts: one part repaying some of the principal of the loan, and the other paying interest. In the situation that a loan is terminated early, a portion of the interest originally calculated for that loan has not yet been paid, as this interest would have been included in the interest portion of future repayments that are no longer going to be made. Some lenders recover ("retain") some (or all) of this interest by adding it to the remaining principal of the loan when calculating a payout figure. This portion of the future interest included in the early payout figure for a loan is known as retained interest.

Usage in Australia

Most Australian lenders offering commercial loan facilities (including

chattel mortgage Chattel mortgage, sometimes abbreviated ''CM'', is the legal term for a type of loan contract used in some states with legal systems derived from English law. Under a typical chattel mortgage, the purchaser borrows funds for the purchase of mov ...

hire purchase A hire purchase (HP), also known as an installment plan, is an arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial installment (e.g., 40% of the total) and repaying the balance of the price of the asset pl ...

and

finance lease A finance lease (also known as a capital lease or a sales lease) is a type of lease in which a finance company is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset, b ...

) for cars,

commercial vehicle A commercial vehicle is any type of motor vehicle used for transporting goods or paying passengers. The United States defines a "commercial motor vehicle" as any self-propelled or towed vehicle used on a public highway in interstate commerce to t ...

s and business equipment add retained interest to payout figures for loans that are terminated early. The amount of retained interest charged varies from lender to lender, but generally ranges from 20% to 100% of unpaid future interest. Additionally, retained interest is generally not included as a fee on the loan documents, but instead listed within the Terms & Conditions of the loan contract. Interest Pricing Contract law Business terms Business law Financial economics