Accelerated Debt Payoff: The Magic of Extra Payments
Most loans are front-loaded with interest. By making even small additional payments toward the principal early in the loan, you can drastically reduce the total interest you pay and shorten your loan term by years. Use this calculator to see your potential savings.
Table of Contents
How Interest is Calculated
Interest is calculated monthly based on your remaining balance.
- Month 1: Balance is high -> Interest charge is high.
- Month 60: Balance is lower -> Interest charge is lower.
When you pay extra, you lower the balance immediately. This means next month's interest charge will be smaller, leaving more of your standard payment to go toward principal. It creates a snowball effect of savings.
The Power of Prepayment
?? Example Savings
On a $200,000 mortgage at 5% (30 years):
- Standard Payment: $1,073/mo. Total Interest: ~$186,000.
- +$100/mo Extra: Payoff in ~25 years. Total Interest: ~$149,000.
- Savings: 5 Years and $37,000!
Strategies to Find Extra Money
- Round Up: Round your payment up to the nearest $100.
- Bi-Weekly Payments: Pay half your monthly payment every two weeks (resulting in 13 full payments per year).
- Windfalls: Apply tax refunds, bonuses, or cash gifts directly to your loan principal.
Frequently Asked Questions (FAQ)
Are there prepayment penalties?
Most modern mortgages and auto loans do not have prepayment
penalties, but you should always check your loan agreement to be sure.
How do I make sure the extra payment goes to principal?
Write a separate check or select "Principal Only" on your online
payment portal. If you don't specify, some lenders will just apply it as a
prepayment for your next month's bill, which doesn't save you any interest.