Where your loan repayments go
Pay extra early in a loan, not late. You pay the same amount every month, but in the early years most of it is interest.
A worked example
Borrow 300,000 at 4% a year over 25 years. The repayment is 1,583.51 a month.
- Interest is charged each month on what you still owe. In the first month that is 300,000 × 4% ÷ 12 = 1,000.
- So of the first 1,583.51, 1,000 is interest and 583.51 reduces the loan.
- Next month you owe slightly less, so slightly less is interest and slightly more reduces the loan.
Progress is slow at first:
- After 5 years: you have paid about 95,000 and still owe 261,314.
- Year 14: the balance first drops below 180,000. That is more than halfway through.
- Over 25 years: you repay 475,053, of which 175,053 is interest.
What the term changes
The same 300,000 at 4% over different terms:
| Term | Monthly repayment | Total interest |
|---|---|---|
| 15 years | 2,219.06 | 99,431 |
| 25 years | 1,583.51 | 175,053 |
| 30 years | 1,432.25 | 215,609 |
Going from 25 to 30 years lowers the repayment by about 151 a month and adds about 40,500 in interest. A longer term costs less each month and more overall.
Why extra repayments help most early on
- An extra payment reduces the balance at once. That lowers the interest charged in every month after it.
- Timing matters. An extra payment in year 2 saves interest for 23 years. The same payment in year 20 saves it for 5.
- Check the fee first. Some lenders charge for early repayment.
Next: enter your own loan in the loan repayment calculator.