How it's calculated
Any fixed-rate installment loan, whether a mortgage, car loan, student loan or personal loan, charges interest each month on the balance you still owe. Your payment covers that interest first and the rest reduces the balance.CFPB Anything you pay on top goes entirely to principal, so next month's interest is charged on a smaller balance, and the effect compounds until the loan is gone.
The calculator runs your loan month by month twice, with your current payment and with your extra payments, and compares when each ends and how much interest each costs.
The formula
- Each month: interest = balance × annual rate ÷ 12, rounded to the cent.
- Principal paid = payment − interest, plus any extra payment.
- New balance = balance − principal paid. Repeat until the balance reaches $0; the last payment is just what's left.
- Months to payoff can also be found directly: n = −ln(1 − B × r ÷ P) ÷ ln(1 + r), where B is the balance, r the monthly rate and P the payment, rounded up to whole months.
- Interest saved = interest on your current plan − interest with extra payments.
If your payment doesn't exceed the first month's interest, the balance never falls and the loan never pays off; the calculator tells you the interest you need to beat.
Worked example
A $20,000 loan at 8% with a $400 monthly payment takes 62 payments and costs $4,409 in interest.
Adding $100 a month saves $1,069 and pays the loan off 1 year 3 months sooner.
| Line | Current plan | With extra |
|---|---|---|
| Monthly payment | $400 | $500 |
| One-time payment | $0 | $0 |
| Total interest | $4,409 | $3,339 |
| Total paid | $24,409 | $23,339 |
| Interest saved | $0 | $1,069 |
A one-time $5,000 payment now, with no monthly extra, saves $2,046.
Assumptions and limitations
- Fixed rate. Variable-rate loans and credit cards change their rate and minimum payment; the results are only a guide for them.
- Enter principal and interest only. For a mortgage, leave out the escrow part of your payment.
- Extra money goes to principal right away. Ask your lender to apply it that way, and check for prepayment penalties.
- Interest is charged monthly on the balance. Some loans accrue interest daily instead; results will differ by a small amount.
- The payoff table summarizes by year. For a full monthly schedule of a new loan, use the amortization calculator.