On a simple interest loan, every extra dollar of principal cuts the interest you pay from then on. ProfitDrawer's car loan guide works an example: a $25,000 loan at 7% APR for 60 months has a $495.03 payment and $4,701.80 total interest. Adding $100 a month pays it off in 49 months instead of 60 and saves $939 in interest. Adding $50 saves about $523; adding $200 saves about $1,560.
Example loan: $25,000 at 7% APR, 60 months, $495.03 a month (simple interest, no prepayment penalty):
| Extra each month | Months to pay off | Total interest | Interest saved |
|---|---|---|---|
| $0 | 60 | $4,701.80 | $0 |
| $50 | 54 | $4,179.18 | $522.62 |
| $100 | 49 | $3,762.80 | $939.00 |
| $200 | 41 | $3,141.43 | $1,560.37 |
Other ways the same guide shows the effect:
- Half payments every two weeks (26 halves, so 13 full payments a year): about 5 months sooner and about $440 saved, if your lender applies them right away.
- One $2,000 lump sum in month 12: about 5 months sooner and about $611 saved.
The earlier you pay extra, the more you save, because interest is charged on the remaining balance. On a precomputed interest loan, extra payments save little or nothing.
Ask your lender to apply extra payments to principal and check your statement. Your loan will differ, so enter your own balance, rate and extra amount in the free loan payoff calculator.
Source: How to Pay Off a Car Loan Faster (ProfitDrawer guide) · Updated
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