Should You Make Extra Loan Payments? How Much You Can Save
Making extra loan payments is one of the simplest ways to save money on interest and become debt-free sooner. But it is not right for every borrower or every loan. Below we show exactly how much extra payments can save on a typical $200,000 loan and the checks to make before you start.
- Extra money goes to principal, so future interest falls and the loan ends sooner.
- Earlier extra payments have a bigger effect than later ones.
- Check for prepayment penalties and keep an emergency fund first.
Why extra payments work
Every extra dollar you pay above the required amount goes straight to principal. That lowers the balance, and since interest is charged on the balance, every future month costs a little less. The savings then compound, because the smaller interest charge leaves more of your regular payment to reduce principal too.
The earlier you pay extra, the bigger the effect, because an early dollar removes interest for many more months than a late one. That is why the same extra payment saves far more in year 2 of a 30-year loan than in year 25.
The numbers: $200,000 at 6% for 30 years
Here is what different extra monthly amounts do on a loan whose required payment is $1,199.10:
| Extra per month | Payoff time | Total interest | Interest saved |
|---|---|---|---|
| None | 30 years | $231,676 | - |
| $50 | 27 years | $203,797 | $27,879 |
| $100 | 24 years 7 months | $182,538 | $49,138 |
| $200 | 21 years | $151,876 | $79,801 |
| $500 | 14 years 11 months | $102,535 | $129,142 |
Even $100 a month saves about $49,138 and takes roughly 5 years 5 months off the loan. At $500 a month you would finish about 15 years 1 months early. You can test your own amounts with the extra payment field in the calculator.
Simple ways to pay extra
- One extra payment a year. Adding one-twelfth of your payment (about $100 a month here) saves about $49,110 and ends the loan about 5 years 5 months sooner.
- Round up. Rounding a $1,199 payment up to $1,250 is easy to sustain and works like a small extra payment.
- Windfalls. A bonus, tax refund or gift applied once to principal is very effective early in the loan.
- Raise the payment with your income. Increase the extra amount each time you get a raise.
What to check first
- Prepayment penalties. Some loans, especially some auto and personal loans, charge a fee for early repayment. Read your contract.
- How the lender applies the money. Ask that extra payments are applied to principal for the current loan, not held as an advance on next month's payment.
- Higher-cost debt. If you have credit card debt at a much higher rate, clearing that usually saves more than prepaying a lower-rate loan.
- Emergency savings. Money paid into a loan is hard to get back. Keep several months of expenses accessible before prepaying.
A simple plan to get started
- Find your rate and balance. Look at your latest statement and note the interest rate, balance and any prepayment terms.
- Pick an amount you will not miss. A small, steady extra payment beats a large one you cannot sustain.
- Automate it. Set a recurring transfer on the same day as your normal payment.
- Label it. Tell the lender or select the option in your online account that the extra amount is for principal only.
- Review yearly. Check your statement to confirm the balance is dropping faster than the schedule, and raise the amount when you can.
Common mistakes to avoid
- Sending extra money without instructions, so the lender treats it as an early payment of next month's installment.
- Prepaying a cheap loan while carrying high-interest card debt.
- Draining emergency savings to prepay, then borrowing again at a higher rate when an unexpected cost appears.
- Ignoring a penalty clause that costs more than the interest saved.
A quick check in the calculator before you commit tells you whether the savings are worth it for your rate and remaining term.
Extra payments or saving and investing?
Paying down a loan gives a guaranteed return equal to the loan's interest rate, while investing has a variable, uncertain return. Many people balance the two: build an emergency fund, take any employer retirement match, then split extra money between debt and investments depending on the loan rate and their comfort with risk. This is general information, not personal advice, so consider speaking with a licensed adviser for your situation.
Related guides
To see how each payment is divided, read how loan amortization works. If your priority is a smaller monthly bill instead, see 5 ways to lower your monthly loan payment.
Frequently asked questions
Do extra payments reduce my monthly payment?
Usually not. On a standard loan they shorten the term. To lower the payment you would need to ask about recasting or refinancing.
Is it better to pay extra early or late in the loan?
Early. Extra principal early removes interest for more months, so it has the largest effect on total interest.
Will extra payments hurt my credit score?
Paying a loan off early does not by itself damage your score, though closing an account can change your credit mix and average account age slightly.