How extra payments shorten a loan
Most car, personal and student loans are amortized: you pay the same amount each month, and each payment first covers the interest that built up since the last one. Whatever is left reduces your balance. Early on, interest takes a bigger share of each payment, so the balance falls slowly at first and faster later.
Extra money you send toward principal comes straight off the balance. A lower balance means less interest next month, so more of every later payment goes to principal. That's why even a modest extra amount can take months off a loan, and your last payment arrives sooner.
In numbers
On a $25,000 car loan at 7% for 60 months, the payment is $495.03. The first payment sends $145.83 to interest and $349.20 to the balance. Over the life of the loan you'd pay $4,702 in interest, for $29,702 in total.
A worked example
Here is the same $25,000 loan at 7% for 60 months, with a regular payment of $495.03, paid a few different ways.
| Plan | Paid off after | Total interest | Interest saved |
|---|---|---|---|
| Regular payments only | 5 yrs | $4,702 | — |
| $50 extra each month | 4 yrs 6 mo | $4,179 | $523 |
| $100 extra each month | 4 yrs 1 mo | $3,763 | $939 |
| $200 extra each month | 3 yrs 5 mo | $3,141 | $1,560 |
| $2,000 once, after 1 year | 4 yrs 7 mo | $4,106 | $596 |
To be done in 3 years instead of 5, you'd pay $771.93 a month, or about $277 more than the regular payment. The calculator works this out for any date you pick.
Figures use this calculator's method (described below) and are rounded to the nearest dollar.
Car, personal and student loans
Car loans
Many car loans use simple interest, where interest is charged on the balance each day and extra payments reduce it right away. Some loans use precomputed interest instead, where the total interest is set when you sign. Paying one of those early can save less than this calculator shows. Federal law bans the "Rule of 78s" refund method on precomputed loans longer than 61 months, but shorter loans may still use it. Your contract says which kind of loan you have and whether there's a prepayment fee.
Personal loans
Many personal loans can be paid off early at no cost, but some charge a prepayment fee. Check your loan agreement before paying extra. When you do, make sure the lender applies the money to principal rather than treating it as an early payment.
Student loans
Federal and private student loans can both be paid off early without a prepayment penalty. By default, a servicer may treat extra money as an early payment and push back your next due date, so ask it to apply the extra to principal instead. If you have several loans, put the extra toward the one with the highest interest rate. If you're on an income-driven repayment plan or working toward loan forgiveness, paying extra may not save you money, so check before you do.
Paying off a mortgage? The mortgage payoff calculator includes yearly extra payments and a full amortization schedule, and the biweekly mortgage calculator compares paying every two weeks.
Balance vs. payoff amount
Your payoff amount is what it takes to close the loan on a specific day, and it's usually a little higher than the balance on your statement. It adds the interest that has built up since your last payment, plus any fees you haven't paid yet. Before you send a final payment, ask your lender for a payoff quote that's good through the date you plan to pay, so a small leftover balance doesn't keep the loan open.
How this calculator works
If you enter the number of payments left, the calculator first finds your monthly payment with the standard formula for a fixed-rate loan:
Here B is your current balance, r is the annual rate divided by 12, and n is the number of payments left. Then it steps through the loan one month at a time:
- Interest for the month is the balance times r, rounded to the cent.
- The rest of the payment reduces the balance, and any extra payment comes off right after. If the regular payment is smaller than the interest, the shortfall is added to the balance before applying extra payments.
- The last payment is only as large as needed to reach zero. A few cents of rounding are folded into it. If you enter the number of payments left, the last of those payments clears any rounding remainder.
- For a target date, it uses the same formula to find the payment that reaches zero in that many months. One-time payments aren't counted there.
Many lenders charge interest daily rather than monthly, so your actual payoff date and interest can differ slightly. The calculator assumes a fixed rate and no fees.
Sources: the Consumer Financial Protection Bureau on payoff amounts, 15 U.S.C. § 1615 on the Rule of 78s, and Finaid on prepaying student loans.
Questions people ask
How do I calculate my loan payoff date?
You need three numbers from your statement: the current balance, the interest rate and your monthly payment. Each month, interest is added and your payment is subtracted, and the payoff date is the month the balance reaches zero. The calculator above does this for you and shows how extra payments move the date.
Is it better to pay extra each month or make one lump sum payment?
Both help, and money paid earlier saves more because it stops interest sooner. A lump sum saves the most when it goes in early in the loan. A steady monthly extra is easier for most budgets and keeps working for the life of the loan. You can model both at once in the calculator.
Why is my payoff amount higher than my balance?
Your payoff amount includes interest that has built up since your last payment, plus any unpaid fees. Ask your lender for a payoff quote that's good through the day you plan to pay.
Can I pay off a car loan early?
Usually, yes. Many car loans use simple interest and have no prepayment penalty, so paying early saves interest. Some loans charge a fee or use precomputed interest, which reduces the savings. Your contract will say which applies.
Should I pay extra on my student loans?
It saves interest on most loans, especially higher-rate private loans. There's no prepayment penalty, but ask your servicer to apply the extra to principal. If you're on an income-driven plan or expect loan forgiveness, paying extra may not help, so check first.
Will paying extra lower my monthly payment?
Usually not. On a fixed-rate loan, the required payment stays the same and the loan simply ends sooner.
What if my payment doesn't cover the interest?
Then the balance never goes down, and it can grow. The calculator tells you when this happens and how much you'd need to pay each month to make progress. Talk to your lender about your options.
Does paying off a loan early hurt your credit?
Closing an installment loan can cause a small, usually temporary change in your credit score. For most people, saving the interest matters more.
