How to Pay Off a Loan Faster and Pay Less Interest
Most car loans, personal loans and student loans are repaid with equal payments, so it can feel as if the only thing you control is whether you pay on time. In fact, a small change to how much or how often you pay can remove months from a loan and save real money. This guide explains why, and what to check first.
Where each payment goes
Each payment first covers the interest that has built up since the last one. Whatever remains reduces the balance, which is called the principal. Because the balance falls over time, later payments carry less interest and more principal. That is also why extra money helps most early on: every dollar of principal you remove stops charging interest for all the remaining payments.
A worked example
Take a $25,000 loan at 7% repaid monthly over five years. The payment is about $495.03, and the total interest is about $4,702. Add $50 to every payment and the loan is finished in 4 years and 6 months instead of 5 years, with about $4,179 of interest, a saving of about $523. Your own numbers will differ, so try them in the calculator.
Ways to pay it off sooner
- Add a little to every payment. A regular small amount is easier to keep up than an occasional large one.
- Round up. Paying a rounded amount above what is due is a painless way to start.
- Use windfalls. Put part of a tax refund or bonus on the balance.
- Choose accelerated payments if your lender offers them. Half of a monthly payment every two weeks adds up to one extra monthly payment a year.
- Shorten the term when you refinance or renew, if the higher payment fits your budget.
Check these first
Ask your lender whether the loan limits extra payments or charges a fee for them, and make sure extra money is applied to the principal rather than held toward your next payment. If you also have a debt at a much higher rate, such as a credit card, that debt usually deserves the extra money first. Our guide on paying off debt covers how to choose.
Find the money
Extra payments have to come from somewhere. Start by looking at what you really spend: make a budget from your bank transactions, and review your subscriptions. When another debt is paid off, keep paying the same amount and move it to this loan.
Try it: See what extra payments would do for your own loan with the free loan calculator, or follow your real payments with the loan tracker.
This guide is general information for everyday budgeting, not financial, tax or legal advice. Rules, limits and rates change, so check official sources or ask a qualified professional about your own situation.
Published by Budget Dashboard. Questions or corrections? Contact us.