How to Calculate Interest Savings by Paying a Loan Off Early

by Emily Weller

Paying a little bit extra on car loan, mortgage or student loan each month reduces the principal of the loan faster than if you paid the scheduled amount each month. If you pay more each month, you end up paying the loan off early, reducing the amount of interest you need to pay. Add up the number of months you had scheduled to repay the loan and the number of months it actually took you to pay it off to determine your interest savings.

1. Add the number of months of the original loan term together. For example, if your loan was originally scheduled to be paid over a period of 24 months, add 24 plus 23, plus 22, plus 21 until you reach 1. For a period of 24 months you will end up with a sum of 300. This is Figure A.

2. Determine how many months you will take to pay off the loan and subtract that number of months from the original term of the loan. If you decide to pay off the loan in 12 months, subtract 12 from 24 to get 12. This is Figure B.

3. Add the digits of the numbers between Figure B and the number 1 together. If Figure B is 12, add 12 plus 11 plus 10 and on until you get to 1. In this example, you will end up with a sum of 78. This is Figure C.

4. Divide Figure C by Figure A. If you divide 78 by 300, you end up with 0.26. This is Figure D.

5. Compute how much interest you would need to pay on the loan if you were to pay according to the original terms. If you have a loan of $6,000 with a 3 percent interest rate, with $257.50 due each month, you will end up paying $180 in interest over 24 months.

6. Multiply the interest you would have paid originally by Figure D. In this example, if you multiply 180 by 0.26, with a product of $46.80, which is how much interest you will save if you pay off your loan in half of the time.

Items you will need

  • Notepad and pen
  • Calculator

Photo Credits

  • Jupiterimages/ Images