Why extra payments work
Each month, interest is charged on the balance you still owe. Your regular payment covers that interest first, and the rest repays the loan.
Any extra amount goes straight to the balance. A smaller balance means less interest next month, and the month after. The savings compound in your favour.
Worked example
A loan of 100,000 at 10% a year over 10 years has a regular payment of 1,321.51 a month. Here is what adding a fixed extra amount every month does:
| Extra each month | Paid off in | Total interest | Interest saved |
|---|---|---|---|
| None | 10 years | 58,580.56 | — |
| 500 | 6 years 2 months | 34,233.28 | 24,347.28 |
| 1,000 | 4 years 6 months | 24,393.40 | 34,187.16 |
| 2,000 | 2 years 11 months | 15,619.10 | 42,961.46 |
Even the smallest extra payment cuts almost 4 years off the loan.
Other ways to pay less interest
- Choose a shorter term. The same loan over 5 years costs 2,124.70 a month but only 27,482.30 in interest. Over 20 years, it costs 965.02 a month and 131,606.05 in interest.
- Make one-off payments. A bonus or tax refund paid towards the balance works like an extra monthly payment, just in one go.
- Compare rates. A lower rate reduces every interest charge. Compare offers using the APR, which includes fees.
Before you pay extra
Some loans charge a prepayment penalty if you pay off a large amount early. These usually apply in the first few years. Small extra payments often don’t trigger them.
Read your loan agreement, or ask your lender:
- whether extra payments reduce the term or the monthly payment;
- whether any fees apply;
- how to make sure the extra goes to the principal.
Use the loan calculator to try your own numbers. Enter an amount in Extra payment each month to see how much sooner you finish.