See how making extra payments on your loan can save you significant interest and help you become debt-free faster.
One of the most powerful strategies for building wealth is paying off debt faster. Even small extra payments can make a massive difference in how much interest you pay over the life of a loan.
When you make your regular monthly payment, most of that money goes to interest in the early years of a loan. This is because interest is calculated on your remaining balance, which is highest at the start.
When you add extra money to your payment, that entire extra amount goes directly to reducing the principal. This lowers the balance, which lowers the interest charged on all future payments. It creates a compounding effect that accelerates your payoff.
Example: On a $200,000 30-year mortgage at 6.5%, adding just $250 per month to your payment saves you $104,000 in interest and lets you pay off the loan 11 years early.
Imagine you have a $200,000 mortgage at 6.5% interest with a monthly payment of $1,264. Here is what happens with extra payments:
You pay $1,264 per month for 30 years. Total interest paid: $254,639. Loan paid off in year 30.
You pay $1,514 per month. Total interest paid: $150,500. Loan paid off in year 19. That is 11 years earlier and $103,139 less in interest.
You pay $1,764 per month. Total interest paid: $99,700. Loan paid off in year 15. That is 15 years earlier and $154,939 less in interest.
Extra payments have the biggest impact early in a loan term. This is when the interest portion of your payment is highest. Making extra payments in the first 10 years of a 30-year mortgage can save twice as much as making the same payments in the last 10 years.
However, extra payments are always beneficial. Even making extra payments late in a loan term will save you some money and help you become debt-free sooner.
You do not need to double your payment to make a difference. Even $50-100 extra per month adds up significantly over time.
Set up automatic extra payments with your lender. This ensures consistency and removes the temptation to skip the extra payment in any given month.
Use bonus payments, tax refunds, or unexpected money to make lump-sum extra payments. This can dramatically accelerate your payoff.
Simple trick: round your payment up to the nearest $100. On a $1,264 payment, paying $1,300 adds $36 extra every month without much pain.
Some loans have penalties for paying off early. Check your loan documents to make sure there are no prepayment penalties before making extra payments.
When making extra payments, clearly specify that the extra amount should be applied to principal, not toward future payments.
Do not drain your emergency fund to make extra loan payments. Keep 3-6 months of expenses saved before focusing on extra debt payments.
Use our free extra payments calculator to see exactly how much you can save.
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