How extra loan payments work
Every dollar above your minimum payment goes directly to your principal balance. This creates a powerful compounding effect: a smaller principal generates less interest the following month, which means a larger portion of your regular payment also chips away at principal. The result is a payoff date that shrinks much faster than you might expect.
On a $15,000 loan at 7.5% over 5 years, adding just $100/month typically saves over $700 in interest and cuts more than 9 months off your payoff timeline.
Frequently asked questions
How do extra loan payments reduce interest?
Every extra dollar above your minimum goes directly to principal, not interest. This reduces the balance on which future interest is calculated, creating a compounding savings effect.
Does my lender automatically apply extra payments to principal?
Not always. You must explicitly instruct your servicer to apply extra payments to principal. Without this instruction, some lenders treat it as a future payment instead.
Is there a penalty for paying off my loan early?
Some lenders charge a prepayment penalty, typically 1–3% of the remaining balance. Check your loan agreement before making large extra payments. Most personal loans originated after 2010 do not have prepayment penalties.
Should I pay off my loan or invest the extra money?
If your loan APR is above 6–7%, paying it down aggressively typically beats investing in a savings account. Below that threshold, investing in a diversified index fund may produce better long-term returns.