Certified Public Accountant and debt specialist focused on accelerating loan payoff and maximizing interest savings.
The **Extra Payment Savings Calculator** allows you to see the powerful impact of making additional payments towards your loan principal. Enter your loan details and your proposed extra monthly amount to calculate the reduction in your loan term and the total interest saved. This calculator primarily solves for the resulting Term and Savings.
Extra Payment Savings Calculator
Extra Payment Savings Formula
Extra payment calculations rely on the monthly payment formula to find the new required term:
1. Calculate the Original Monthly Payment ($M_{orig}$) using $P, R, N_{orig}$:
M_orig = P × [ i(1 + i)ᴺ ] ÷ [ (1 + i)ᴺ – 1 ]
2. Calculate the New Loan Term ($N_{new}$) using $P, R$, and the new effective payment ($M_{new} = M_{orig} + M_{extra}$):
N_new = -ln (1 - P × i ÷ M_{new}) ÷ ln(1 + i)
3. Calculate Total Interest Saved:
Savings = (\text{Total Original Interest}) - (\text{Total New Interest})
Formula Source: Bankrate – Extra Payment Logic
Variables Explained
- F (Principal Loan Amount): The initial amount borrowed.
- P (Annual Interest Rate %): The fixed annual interest rate (R).
- V (Original Loan Term): The original scheduled repayment term, in months ($N_{orig}$).
- Q (Extra Monthly Payment): The amount added to the regular payment each month ($M_{extra}$).
Related Calculators
- Loan Term Reduction Calculator
- Full Amortization Schedule Calculator
- Total Interest Comparison Calculator
- Debt Snowball vs. Avalanche Calculator
What is an Extra Payment Savings Calculator?
An **Extra Payment Savings Calculator** demonstrates the benefit of applying additional funds directly to the principal balance of a loan. Since interest is calculated based on the outstanding principal, reducing the principal balance faster means less interest accrues over the life of the loan. This results in a shorter loan term and significant savings in total interest paid.
This calculator is often used by homeowners with mortgages or individuals with large long-term debts like student loans. The results show the power of accelerated debt payoff, turning years of debt into months and thousands of dollars saved in interest, provided the loan agreement allows for penalty-free prepayments.
How to Calculate Savings (Example)
Scenario: $200,000 Loan, 4.5% Rate, 360 Months (Original Payment: $1,013.37)
- Original Total Interest Paid:
$$(\$1,013.37 \times 360) – \$200,000 = \$164,813.20$$
- New Effective Payment:
$$M_{new} = \$1,013.37 + \$100 \text{ (extra)} = \$1,113.37$$
- Calculate New Term ($N_{new}$):
Using the annuity formula with $M_{new}$, the new term is calculated to be approximately $309.4$ months.
- New Total Interest Paid:
$$(\$1,113.37 \times 310 \text{ months}) – \$200,000 \approx \$145,104.70$$
- Total Savings:
$$\$164,813.20 – \$145,104.70 = \$19,708.50 \text{ saved!}$$
Frequently Asked Questions (FAQ)
Principal is the actual amount you borrowed. Interest is the fee charged by the lender for the use of that money. Extra payments go directly to reducing the principal, which in turn reduces the future interest charged.
Is it better to invest or pay extra on my mortgage?This is a personal decision. Generally, if your loan rate is higher than the expected, safe return on investment (e.g., 5% vs. a 3% safe bond return), paying off the debt is the safer and more profitable option.
Do all loans allow extra payments?Most common loans (mortgages, auto loans) allow extra payments. However, some loans, particularly older or specific commercial loans, may have prepayment penalties. Always check your loan agreement first.
How often should I make extra payments?The sooner you make the extra payment, the more interest you save. Making one large extra payment at the beginning of the year is generally better than smaller, spread-out payments, but a regular monthly extra payment (as calculated here) is the most sustainable strategy for many people.