Do you pay interest if you pay more than minimum payment?

How Paying More Than the Minimum Payment Impacts Interest

When you have a loan or credit card debt, it’s easy to stick to making only the minimum payment each month. However, this strategy can cost you more in the long run due to the accumulation of interest. Interest is a fee charged by lenders for borrowing money, and it’s calculated as a percentage of the outstanding balance.

Paying more than the minimum payment directly impacts the amount of interest you pay. Here’s how:

Reduced Outstanding Balance:

When you pay more than the minimum, each extra dollar applied to the principal reduces the outstanding balance. This lowers the amount of debt you owe, which in turn reduces the amount of interest you’ll be charged.

Example: Let’s say you have a credit card balance of $1,000 and a 15% interest rate. The minimum payment is $25. If you pay only the minimum, it will take you 101 months to pay off the debt and you’ll pay a total of $325 in interest. However, if you pay $50 per month instead, it will take you only 42 months to pay off the debt and you’ll pay just $144 in interest.

Faster Debt Reduction:

Paying more than the minimum helps you pay off your debt faster. This means you’ll be debt-free sooner, which can have a positive impact on your credit score and overall financial health.

Lower Interest Costs:

The faster you pay off your debt, the less interest you’ll pay over time. In the example above, paying $50 per month instead of $25 reduces your interest payments by over half.

Conclusion:

Making extra payments on your debt, even small ones, can have a significant impact on the amount of interest you pay. By reducing your outstanding balance and paying off your debt faster, you’ll save money and improve your financial well-being.