Does paying more than the minimum lower interest?

Lower Interest, Higher Payments: The Benefits of Paying More Than the Minimum

When it comes to managing debt, one of the most common questions borrowers have is whether paying more than the minimum payment actually makes a difference. The answer is a resounding yes. Making higher payments can significantly reduce the amount of interest you pay over the life of the loan, saving you money in the long run.

How Higher Payments Reduce Interest Accrual

Every time you make a payment on a loan, a portion of it goes towards paying off the principal balance (the amount of money you borrowed) and the rest goes towards paying off the interest accrued on the loan. When you only make the minimum payment, a larger portion of your payment goes towards interest, and a smaller portion towards the principal.

By paying more than the minimum, you increase the portion of your payment that goes towards the principal. This reduces the amount of principal that remains outstanding, which in turn reduces the amount of interest that is accrued on the loan.

Example

To illustrate the benefits of paying more than the minimum, let’s consider the following example:

• Loan balance: $1,000
• Annual percentage rate (APR): 13%
• Minimum payment: $25

Scenario 1: Paying the Minimum

If you only make the minimum payment of $25 each month, it will take you 51 months (over 4 years) to pay off the loan. During that time, you will pay a total of $1,300 in interest.

Scenario 2: Paying $50 Per Month

If you increase your monthly payment to $50, you will pay off the loan in 26 months (just over 2 years). During that time, you will pay a total of $650 in interest.

By paying $25 more per month, you save $650 in interest and pay off the loan over 2 years earlier.

Conclusion

Making higher payments on your loans is a smart financial move that can save you a significant amount of money over time. By reducing the interest accrued on your loan, you can pay it off faster, build equity in your assets, and achieve your financial goals sooner. If you have the means, consider increasing your monthly payments today and start reaping the benefits of lower interest payments.