How to Calculate Paying Extra on a Loan

Making extra payments on a loan helps reduce your principal balance more quickly. In turn, this not only assists you in paying off your loan earlier than scheduled, but it also saves money on interest. Most types of loans allow you to make extra payments of any amount at any time. You can include your extra payment with your regular payment or send a separate payment during another time of the month. Calculate the impact of the extra payment by hand or with an online loan calculator.

Instructions

Calculate Online

1

Type your original loan terms, including the amount borrowed, interest rate, length of the repayment term and the date on which you took out the loan.

2

Calculate the monthly payment based on this information and ensure that it matches with your regular monthly payment. If it does not, go back and check the information you entered.

3

View the amortization table to see when your loan will be paid off and how much interest the regular repayment schedule will cost you.

4

Type in the amount of your extra payment or payments. You can calculate the impact of extra monthly payments, extra yearly payments, extra one-time payments or any combination of the three.

5

Recalculate the amortization table with your extra payments. The last line in the table will show you when your loan will be paid off and how much total interest you will pay.

6

Compare the numbers with the extra payments to those with the regular schedule to find out how many years early you will pay off your loan and how much you will save in interest by making extra payments.

Calculate By Hand

7

Look at your most recent loan statement to find out your remaining principal balance. Find your interest rate on the original agreement or on your most recent statement.

8

Convert the annual interest rate into a monthly interest factor by dividing it by 1,200. For example, an annual rate of 7 percent becomes 0.00583.

9

Multiply the monthly interest factor by your current principal balance to calculate the monthly interest charge. For example, if your balance is $5,923, your interest for the month is $34.53.

10

Subtract the interest from the amount of the payment you plan to make this month to calculate how much of your payment that goes toward reducing the principal.

11

Subtract the principal payment amount from the current principal balance. For example, if you planned a total payment of $400, $365.47 goes toward principal and your new principal balance is $5,557.53.

12

Repeat Steps 3 through 5 for each subsequent monthly payment. This method has the advantage of allowing you to calculate the impact of extra payments of varying amounts.