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Extra loan payments: are they worth it?

See how much interest you avoid by making extra payments on a mortgage, car loan or personal loan, whether it is better to shorten the term or lower the payment, and whether paying down beats investing the same money.

Educational simulation. Not investment advice. Results are estimates based on the data you enter and do not replace advice from a qualified professional.

Reviewed on Nov 1, 2026

Example values. Use the figures from your loan statement: it works for mortgages, car loans and personal loans.

Ready-made examples

Your loan today
Extra payments

What to reduce

Alternative: invest

What the money would earn, after tax, if you invested it instead of paying the loan down.

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—Interest you no longer pay
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The debt with and without extra payments

Balance over time without extra payments, shortening the term and lowering the payment.

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What you pay each month

Payment with insurance on each path. Lowering the payment keeps the term; shortening the term ends the debt sooner.

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Pay down the loan or invest the same money?

Net worth (investments minus debt) spending the same each month on the three paths. Whoever pays off sooner invests the payment that ended.

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Year by year

The summary lists your inputs, results, formulas, assumptions and sources. The full report also includes the charts and interpretations, in color. In the print dialog, choose Save as PDF.

Method, assumptions and sources

Formulas

Interest = balance × i; i = (1 + yearly rate)^(1/12) − 1
Constant principal: principal = balance ÷ months left; fixed payment = balance × i ÷ [1 − (1 + i)^−n]
Shorter term: keeps the original principal (constant) or payment (fixed); lower payment: recalculated from the balance and months left
Pay down or invest: same monthly outlay (original payment + extra) on all three paths

Assumptions and limits

  • Official terms are those in your loan contract. Confirm with your lender how the extra payment is applied and the new balance before paying.
  • Fixed rate; insurance and fees treated as fixed while the debt lasts. Prepayment penalties and adjustable rates are not included.

Official sources and references

  • Consumer Financial Protection Bureau, What is a prepayment penalty?
  • Brealey, Myers & Allen. Principles of Corporate Finance, ch. 2 (annuities). McGraw-Hill.

Frequently asked questions

Is it better to shorten the term or lower the payment?

Shortening the term saves more interest. Lowering the payment makes sense when the payment is tight or when you want to free money for more expensive debts.

Should I pay down the loan or invest?

Compare the loan’s cost with what your investments earn after tax. If the loan costs more, paying down wins, as long as you keep an emergency fund. The third chart runs this comparison with your numbers.

How do I read the default example?

A $300,000 mortgage with 300 months left at 6.5%, fixed payment, with $20,000 now and $300 a month extra: you avoid about $127,507 of interest by shortening the term, and the loan ends in 197 months instead of 300, about 8.6 years sooner.

Does it work for car loans and personal loans?

Yes. Use the “Car loan” or “Personal loan” examples, or type your own balance, months left and rate. With high-rate loans, paying down almost always beats any safe investment.

Will my lender apply the extra to principal?

Usually, but not always automatically. Ask the lender to apply extra payments to principal and check your next statement. Some loans charge a prepayment penalty; read your contract.

What does the calculation leave out?

Prepayment penalties, rate changes on adjustable loans, escrow for taxes and insurance and tax deductions for mortgage interest. Insurance is treated as a fixed monthly amount.

When should I talk to a professional?

If you are deciding between paying down a mortgage and saving for retirement or college, a financial planner can help weigh taxes, employer matches and liquidity.

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Extra loan payments: shorter term or lower payment?

An extra payment goes straight to the principal, so from that month on you pay interest on a smaller balance. It works the same way for a mortgage, a car loan or a personal loan: the higher the rate and the earlier you pay, the more you save.

Shorter term or lower payment

Most lenders let you choose. Shortening the term keeps the payment and ends the loan sooner; it saves the most interest. Lowering the payment keeps the end date and reduces each installment; it saves less, but frees money every month. For a $300,000 mortgage at 6.5% with 25 years left, $20,000 now plus $300 a month cuts years off the loan and tens of thousands in interest.

Pay down or invest?

Prepaying is like investing at the loan rate, tax-free and risk-free. If your investments earn less than the loan costs after tax, paying down wins. If they earn more, investing may leave more wealth, but with risk. Credit card and personal loan rates are almost always higher than any safe investment.

Before you prepay

Keep an emergency fund first, pay off more expensive debts, check whether your contract has a prepayment penalty, and ask the lender to apply the extra to principal. Confirm the new balance on your next statement.