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In Finance, what is an Average Life?

Mary McMahon
Updated May 16, 2024
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The weighted average life (WAL) or average life reflects the average number of years required to pay off one unit of the principal on a loan, such as a dollar. In a 10 year loan with no interest and biweekly payments, for example, the WAL would be five years. However, most loans come with interest, and this is why it is referred to as a “weighted” average, reflecting the fact that some payments carry more weight than others when it comes to paying down the principal balance on the loan. Thus, something like a thirty year loan could have a weighted average life of 17 years or more, depending on the amount of interest.

To calculate the WAL of a debt, people look at the principal, the interest, and the repayment period. The amounts of the payments are also taken into account. Using this information, people can determine, on average, how long it takes to pay off a single dollar or other unit of currency. This information can also be used to find out how long it will take to pay down half the principal.

A number of things can skew the weighted average life. Some loans have unequal payments, with people paying more or less at the start of the loan period than they do at the end. Likewise, changes in interest rates can throw the calculation off. In addition, people can repay loans early, which will reduce the average life by paying off more of the principal with each payment. The basic calculation assumes that the payments will remain consistent as scheduled.

Calculating WAL is generally not as important to individual consumers, but it can be important for businesses. This can be used both to determine how payouts on the loans a business takes out will work, and how payments made on loans extended by the business will function. As can be seen when making calculations, the higher the interest rate, the higher the weighted average life.

It can be helpful to determine the WAL on a loan, especially when people are applying the loans. Another thing people may want to consider is interest paid over the life of the loan. As a general rule, it is better to pay more on a loan in the beginning and less in the end, if payments are going to be skewed, because this will pay the principal down quickly and reduce the average life in addition to the amount paid in interest over the life of the loan.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By sunshined — On Jun 01, 2012

@golf07 - I have received letters like this in the mail showing me how I can reduce the average monthly life of my mortgage loan by doing this.

They show how much money you save in interest over the course of the loan payments. It makes a lot of sense to me, but I have just never made the effort to do it.

I can see how this would be helpful not just for mortgage payments but any kind of loan. If I could get my car paid off faster, then maybe I would have more money to put towards my mortgage payments.

By golf07 — On May 31, 2012

I have been able to reduce the average life of my loan by making bimonthly payments. Instead of making just one payment every month, I divide that payment into two payments every two weeks.

What this does over the year, is allow me to make one extra payment each year, which helps me reduce the average life of the loan.

When I do it this way, I don't have any trouble coming up with the money to make the payments. If I had to come up with one whole extra monthly mortgage payment during the year though, I would have a hard time doing this.

By John57 — On May 31, 2012

It seems like I never have the extra money to pay down my mortgage loan faster. One thing I have taken advantage of though, is lower interest rates.

If they drop low enough, I will re-finance my loan. The first time I did this, I kept my loan for the same number of years, but had a much lower payment.

The next time I did this, I was in better financial shape, so I left the monthly payment amount about the same, and reduced the number of years on the loan.

This really reduced the average life of the loan and is helping me pay it off much more quickly. It also made a huge difference in the dollar amount of interest I paid over the lifetime of the loan.

Sometimes it can seem like such a large amount of debt that it will never be paid off. I just know the quicker I can pay off the interest the sooner my mortgage will be paid off.

By SarahSon — On May 30, 2012

When it comes to mortgage payments, I like to reduce the average life as much as I possibly can. There are several online tools where you can play around with this information.

One thing I like to do is an amortization schedule which shows me a breakdown of the amount of principal and interest that is included with each payment.

If I have the extra money, I will include the next month's interest payment with the current monthly payment.

This can be quite high at the beginning of the loan, but over time, it really helps pay the loan off at a much faster rate.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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