How extra payments shorten a loan

Each monthly payment on an amortizing loan first covers the interest owed for that month. Whatever is left reduces the principal.

When you add an extra amount and your lender applies it to principal, next month's interest is calculated on a smaller balance. That effect compounds over the life of the loan, which is why early extra payments save more than late ones.

Ask your lender to apply extra money to principal, not to future installments, and check whether your contract has prepayment fees.

Try the numbers on our loan payoff calculator.