- Home -

- Forum -

How to Save a Bundle on Loan Interest

by Neil Shelton

copyright Walt Disney Co.

If Scrooge's lament sounds strangely familiar to you, perhaps you've had occasion to regret the amount of your lifestyle that goes to pay interest on loans.

Nobody likes to pay interest, but chances are, unless you were born very, very rich or very, very poor, you are currently paying interest to someone on a loan for something..

We don't need to beat ourselves up over that.  Because, without borrowed money, how many of us would have an education?  How many would have a vehicle that starts every morning?  How many would have a home or a homestead?

Interest is the penalty that we pay for not being very, very wealthy or very, very destitute.

Having accepted that trauma, we can move on to ask ourselves what can be done to minimize our exposure, and as luck would have it, there are a few ways to make it easier to pay most any note off in reduced time at less expense and without adding too great a financial burden.  I'm going to show you three.

That's not to say that the methods I'm about to demonstrate are any sort of free lunch, they aren't.  You pay interest for the use of someone else's money and these techniques work because you "rent" less of their money for a shorter period of time.

Here are three ways to accelerate the payment of almost any amortized loan (some lenders don't allow you to make pre-payment) and each one is designed to reduce your interest charges and have your note paid off as soon as possible in a manner that has the least negative impact on your lifestyle.

Interest is the rent you pay for the use of other people’s money.  None of these strategies amounts to a free lunch; that is you have to pay greater payments in order to lower interest costs and get your note paid off sooner.  However, these are proven strategies that many people have used with success and you can too.

All of the examples I’ve provided here are based on a typical 15-year loan of $10,000 bearing annual interest at the rate of 9% per year (per annum).   [To manage your interest payments, you’ll need an amortization schedule.  You can probably find one at one of the advertising links on the right side of this page or I've made a simple schedule in MS Excel that you can download here.] 

Here’s what an amortization schedule for our typical loan will look like:

In the top part of the window, you see the total amount borrowed, $10,000, and the computations for principle and interest are figured with each successive payment.  Notice that the first month, when you make your first payment of  $101.50, only $26.50 of your payment goes toward your equity, that is to decrease your debt, and the rest, about 75%, goes to interest.  Note that this situation gets progressively better with each succeeding payment so that fifteen years later, at the end of the loan (the bottom part of the window) almost all the payment goes toward equity with almost none of it going to interest.

It's important to note that the more extra principal (the part of your payment that goes to reduce your debt) you pay at the beginning of your loan, the more you save.  Paying off principal will always lower interest charges, but the gains are multiplied over the life of the debt.

Obviously, things are going to be a lot more fun at the end of the loan than at the beginning, but paying a few extra dollars into your note early-on will reap impressive benefits later.

 Just to demonstrate exactly how impressive, let’s start out by making an extra $100 payment at the very beginning of the loan.  That is, when you make out the check for your first payment, in this case $101.50 you pay $201.50 instead.

Here’s what the amortization schedule looks like. 

 Now let’s see how much good that extra $100 did for us.  Plenty.  Fifteen years later, at the end of the loan you’ve saved $280.95 in interest paid, and you’ve retired your debt three months early!  All this for a hundred bucks.. 

 So you can see that, if you can pay a bit more than the program calls for, you can save yourself a nice bit of change.

 So now that you’ve got the hang of how it works, lets investigate the three strategies to save on interest.

 
Next  page