The Power of Extra Payments
Making extra payments on your loan is one of the most effective ways to save money and become debt-free faster. Even small additional amounts can make a dramatic difference over time.
Why It Works
How Extra Payments Save Money
Consider a $15,000 loan at 18.99% APR with a $400 monthly payment:
| Scenario | Payoff Time | Total Interest | Savings |
|---|---|---|---|
| $400/month only | 4.8 years | $7,936 | — |
| +$50 extra | 3.9 years | $5,869 | $2,067 |
| +$100 extra | 3.3 years | $4,633 | $3,303 |
| +$200 extra | 2.6 years | $3,310 | $4,626 |
Double Impact
Strategies for Faster Payoff
1. Round Up Payments
If your minimum is $387, round up to $400 or even $450. The small difference adds up significantly over time.
2. Bi-Weekly Payments
Instead of 12 monthly payments, make 26 half-payments. This results in one extra full payment per year without feeling the pinch.
3. Lump Sum Windfalls
Apply tax refunds, bonuses, or gifts directly to your loan principal. A single $1,000 windfall can save hundreds in interest.
4. Debt Avalanche Method
If you have multiple debts, focus extra payments on the highest-interest debt first. This mathematically minimizes total interest paid.
Interest Cost Over Time
High-interest debt like credit cards can cost you more in interest than the original purchase. Here's how interest rates affect total cost:
| APR | Interest on $10K (5 years) | Total Paid |
|---|---|---|
| 6% | $1,600 | $11,600 |
| 12% | $3,346 | $13,346 |
| 18% | $5,231 | $15,231 |
| 24% | $7,272 | $17,272 |
$200/month payment on $10,000 balance
Credit Card Trap
The Minimum Payment Trap
Credit card companies love minimum payments because they maximize their profit. A $5,000 balance at 20% APR with 2% minimum payments takes over 30 years to pay off!
- Minimum payments are designed to keep you in debt longer
- Most of your minimum payment goes to interest, not principal
- Always pay more than the minimum when possible
- Even $20 extra per month makes a significant difference
Types of Loans This Applies To
| Loan Type | Typical APR | Extra Payment Impact |
|---|---|---|
| Credit Cards | 18-26% | High impact - prioritize these! |
| Personal Loans | 8-15% | Moderate impact |
| Auto Loans | 4-10% | Moderate impact |
| Student Loans | 4-8% | Lower impact, but still helpful |
| Mortgages | 6-8% | Huge long-term savings |
Frequently Asked Questions
Q: Is there a penalty for paying off loans early?
A: Most consumer loans (credit cards, personal loans, auto loans) have no prepayment penalty. Mortgages sometimes do in the first few years — check your terms.
Q: Should I pay extra or invest the money instead?
A: If your loan rate is higher than expected investment returns (after taxes), pay off the debt. For low-rate debt (under 5%), investing may be better mathematically.
Q: How do I specify extra payments go to principal?
A: Contact your lender to ensure extra payments are applied to principal, not future payments. Most online systems have an option for this.
Q: Should I pay off smallest debt or highest interest first?
A: Mathematically, highest interest (Avalanche) saves more money. Psychologically, smallest balance (Snowball) provides quick wins. Both work — pick what motivates you.
Q: What if I can't afford extra payments?
A: Even $10-20 extra helps. Look for ways to cut small expenses, or apply any unexpected money (like rebates or gifts) to your debt.
Action Steps
- List all your debts with balances and interest rates
- Identify the highest-interest debt to prioritize
- Find at least $25-50 extra per month to add to payments
- Set up automatic payments so you don't forget
- Celebrate milestones to stay motivated
This calculator provides estimates for educational purposes. Actual results may vary based on payment timing, fees, and lender policies. Contact your lender for exact payoff amounts.