Do extra repayments reduce interest?

Accelerated Loan Repayment: Slashing Interest and Saving Big

When it comes to paying off debt, most people focus on making the minimum monthly payment on time. While this is a responsible approach, it may not be the most cost-effective strategy. By making extra principal payments, you can save significant money on interest and shorten the life of your loan.

How Extra Repayments Work

When you make an extra principal payment, you’re essentially paying down the principal balance of your loan faster. This has two main benefits:

• Reduced interest charges: Interest is calculated based on the outstanding principal balance. As you pay down the principal, the amount of interest you owe each month decreases.
• Shorter loan term: By paying down the principal faster, you can reduce the overall lifespan of your loan. This means you’ll pay off the loan sooner and be debt-free faster.

The Math Behind the Savings

Let’s say you have a $10,000 loan with an interest rate of 5% over a 5-year term. If you make only the minimum monthly payment, you’ll pay $2,023.75 in interest over the life of the loan.

However, if you make an extra monthly principal payment of $100, you’ll save $642.75 in interest and pay off the loan in just 3 years and 10 months.

Benefits of Accelerated Loan Repayment

In addition to saving money on interest, accelerated loan repayment offers several other benefits:

• Faster debt elimination: You can get out of debt sooner and free up your cash flow for other financial goals.
• Improved credit score: Reducing your debt-to-income ratio can improve your credit score and qualify you for better interest rates on future loans.
• Lower stress: Paying off debt can reduce financial stress and give you peace of mind.

How to Make Extra Payments

Making extra principal payments is easy. Simply apply any extra money towards the principal balance of your loan. You can do this by:

• Making lump-sum payments whenever possible
• Increasing your monthly payment amount
• Setting up automatic transfers from your checking to your loan account

Conclusion

Accelerated loan repayment through extra principal payments is a smart financial move that can save you thousands of dollars in interest and help you pay off your debt faster. By proactively managing your loan, you can achieve financial freedom sooner and enjoy the benefits of a debt-free life.