Overview

Main Menu Name: Extra Pay

Calculates the effect of making extra payments on a loan.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

Borrowing money is something that most of us do more than once during our lifetimes. Few of us can buy a home or a car, send our children to college, or take an expensive vacation without borrowing some part of the money to pay for it. Even if other funds are available, borrowing may be financially advantageous once tax and investment factors are considered. Interest charges may be deductible against taxable income, and current investments may provide a very attractive rate of return and should not be liquidated.

Deciding when to borrow, how much, at what interest rate, and from which lender can be a very complex financial decision. So-called "truth-in-lending" laws require banks, savings and loans, finance companies, and other lenders to provide borrowers with essential information on their loans. This information includes the principal amount, the rate of interest charged, the regular periodic payment (normally a monthly payment), and the number of payments required in order to pay off the loan. They are also required to state the total amount of interest that will be paid during the life of the loan.

Frequently borrowers may wish to pay more than the regular payment on their loan. Extra payments during the term of the loan can considerably reduce the total amount of interest paid and will result in paying off the loan sooner than originally scheduled. Even a few extra payments can have a dramatic effect on interest paid and the life of the loan.

Borrowers should determine whether or not they can afford to make extra payments, and if so, when and in what amount. It isn't necessary to make large extra payments in order to have a substantial effect on the loan. A few extra dollars each month, or an occasional extra payment, can be just as important to paying off the loan prior to maturity.

Why should I use this calculator?

• Evaluate the attractiveness of a loan.
• Determine the regular monthly payment necessary to pay off a loan over the original term of the loan.
• Determine the breakdown of the loan payment between principal and interest.
• Determine the effect of making extra payments on the loan principal.
• Calculate when the loan will be paid off if extra payments are made.

Getting Started

Borrowing money is something that most of us do more than once during our lifetimes. Few of us can buy a home or a car, send our children to college, or take an expensive vacation without borrowing some part of the money to pay for it. Even if other funds are available, borrowing may be financially advantageous once tax and investment factors are considered. Interest charges may be deductible against taxable income, and current investments may provide a very attractive rate of return and should not be liquidated.

Deciding when to borrow, how much, at what interest rate, and from which lender can be a very complex financial decision. So-called "truth-in-lending" laws require banks, savings and loans, finance companies, and other lenders to provide borrowers with essential information on their loans. This information includes the principal amount, the rate of interest charged, the regular periodic payment (normally a monthly payment), and the number of payments required in order to pay off the loan. They are also required to state the total amount of interest that will be paid during the life of the loan.

Frequently borrowers may wish to pay more than the regular payment on their loan. Extra payments during the term of the loan can considerably reduce the total amount of interest paid and will result in paying off the loan sooner than originally scheduled. Even a few extra payments can have a dramatic effect on interest paid and the life of the loan.

Borrowers should determine whether or not they can afford to make extra payments, and if so, when and in what amount. It isn't necessary to make large extra payments in order to have a substantial effect on the loan. A few extra dollars each month, or an occasional extra payment, can be just as important to paying off the loan prior to maturity.

Entering Data

1. Principal:  Enter the original principal amount of the loan.
2. Term (Months):  Enter the term of the loan (up to 360 months).
3. Interest Rate:  Enter the annual interest rate charged on the loan.
4. Extra Amount:  Enter the amount of any extra payments on the loan.
5. First Month of Extra Payments:  Enter the month when the extra payments will begin.
6. Last Month of Extra Payments:  Enter the last month of extra payments.

Results

The program provides a total of the payments, interest, standard principal, and extra principal paid over the selected number of months. It also calculates the standard monthly payment for the loan. This payment will be broken down into two amounts, the monthly interest paid and the amount applied toward the principal balance of the loan. Finally, the program reflects any extra principal payments that are made and determines the outstanding principal balance at the end of each month.