Paying Extra on a Loan: How Much Can You Save?
Extra payments go straight to principal, so they cut the interest you pay and shorten the loan. Here is how much difference they make and what to check before you start.
By the Loan Calculator team · Updated
What an extra payment does
Your required payment covers each month’s interest plus scheduled principal. Anything extra, applied to principal, lowers the balance immediately. Interest each month is based on that balance, so every later month costs less interest, and the loan ends early.
Your required payment usually doesn’t change on a fixed-rate installment loan. The loan simply finishes sooner.
An example
On a $250,000, 30-year loan at 6.5%, the required payment is $1,580.17 and the total interest over 30 years is about $318,861.22.
Adding $100 a month cuts the total interest to about $260,001.34, a saving of $58,859.89, and the loan is paid off 4 years and 8 months early.
Check these with your lender first
- Prepayment penalties: some loans charge a fee for paying early. Your loan agreement will say.
- How extra is applied: ask for extra amounts to go to principal, not toward next month’s payment. Many servicers let you choose this online.
- Multiple loans: with several loans (for example, student loans), ask to apply extra to the loan with the highest rate.
When paying extra might not be the best move
Paying extra earns you a guaranteed return equal to the loan’s rate, but the money becomes hard to get back. Before paying extra on a low-rate loan, many people first build an emergency fund, pay off higher-rate debts such as credit cards, and take any employer retirement match. The right order depends on your situation, and a qualified adviser can help you weigh it.
Other ways to pay down faster
Biweekly payments — half a payment every two weeks — add up to 26 half-payments, or 13 full payments a year, which works like one extra payment a year. Some servicers charge fees for biweekly programs, and you can get the same result by adding one-twelfth of a payment to each monthly payment. Lump sums, such as part of a tax refund, also work well, especially early in the loan.
Try it with your own numbers
Sources and further reading
- Mortgages: tools and answers — Consumer Financial Protection Bureau
- Repaying your federal student loans — Federal Student Aid, U.S. Department of Education