Borrowing costs you in the form of monthly interest you pay on your debt. One way to reduce the cost of a debt is to pay it off early and save on future interest payments. The exact amount of money you save depends on your interest rate, how big the debt was, how quickly you pay it off and how long it would have been until you paid it off on the regular schedule.
Lump Sum Payoff
When you pay off a debt early with one large lump sum, you save all of the money that you were scheduled to pay in interest between then and the regular payoff date. You can look up this amount on your loan's amortization schedule. Just add up the interest portion of each scheduled payment that you eliminated by paying off the debt early.
Regular Extra Payments
If you can't afford to pay off your debt early with one large payment, you can still make small extra payments to pay off the debt faster and save money on interest. The calculation of savings in this case is not as simple as with a lump sum payoff because each of your extra payments saves you a little bit on interest by reducing the principal balance on which you are charged interest each subsequent month. You can calculate a new amortization schedule for your payment amount and compare the interest payments to what it would have cost you on your previous schedule.
Online Calculators
The best way to calculate exactly how much money you will save is to use an online calculator. Websites provide calculators for just about every type of loan and a variety of early repayment scenarios. Enter data about your loan, including the interest rate, repayment term, number of payments remaining, scheduled monthly payment and your actual monthly payment. The calculator will tell you how long it will take to pay of off the debt and how much money you will save.
Payoff Strategies
Each extra payment counts toward reducing your interest cost, regardless of the size of the payment. People sometimes can pay off a debt in a lump sum by using a tax refund, bonus from work, inheritance or sale of stocks. Most people instead chip away at a debt with extra payments each month. Some ways to find money for extra payments include getting another job, reducing personal expenses and eating out less frequently. If you have multiple debts you want to pay off, you will save the most interest if you put your extra payments toward the debt with the highest interest rate first.
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