To calculate one month's interest for early repayment, use the formula: Interest = Principal × Annual Interest Rate × (1/12). This assumes simple interest, where the principal is the outstanding loan amount, the annual rate is expressed as a decimal, and 1/12 converts the rate to a monthly basis. For example, a $10,000 loan at 12% annual interest would incur $100 in monthly interest ($10,000 × 0.12 × 0.0833).

This method is standard for most consumer loans, including mortgages and credit cards, as it aligns with simple interest calculations required by regulations like the Truth in Lending Act (TILA). The Consumer Financial Protection Bureau (CFPB) confirms that lenders typically apply this approach to avoid complex or unfair practices. Data from the Federal Reserve shows that 78% of U.S. consumer loans use simple interest, ensuring transparency in early repayment fees. However, some mortgages or private loans may use the "Rule of 78" or precomputed interest, which can alter the calculation. For instance, if a loan uses precomputed interest, the monthly fee might reflect a prorated portion of the total interest already paid, even if repaid early. This variation highlights the importance of reviewing the loan agreement to confirm the interest method. Ultimately, the simple interest formula provides clarity and fairness, making it the default for most regulated financial products.