How much interest do you save by paying off a personal loan early?

Summary

On a loan where interest is charged on the unpaid balance, every extra dollar of principal stops earning interest for the rest of the loan. In a $10,000, 12%, 36-month example, adding $50 a month pays the loan off in month 31 and trims total interest from $1,957.15 to $1,651.83, a saving of $305.32. Upgrade, LightStream, Wells Fargo, Navy Federal, and PenFed all say they charge nothing for paying early.

Where the interest goes

Here is the same $10,000 loan at 12% (1% a month) with its regular $332.14 payment, modeled without fees:

Payment	Interest	Principal	Balance after
1	$100.00	$232.14	$9,767.86
2	$97.68	$234.46	$9,533.39
12	$73.15	$258.99	$7,055.84
24	$40.30	$291.84	$3,738.30
36	$3.29	$328.85	$0.00

The first payment is almost one-third interest. By payment 24, interest is down to about an eighth of it. An extra payment in year one goes after a bigger balance, which is why early money does more.

Compare three ways of paying ahead, assuming every extra dollar goes straight to principal. An extra $50 a month finishes in month 31 and saves $305.32 in interest. An extra $100 a month finishes in month 27 and saves $526.23. A single $2,000 payment right after payment 12 finishes in month 29 and saves $458.89. Per extra dollar, the lump sum saves about 23 cents of interest and the $50 plan about 20 cents.

What the contract has to tell you

Regulation Z, at 12 CFR 1026.18(k), requires the loan disclosure to say whether a charge may be imposed for paying all or part of the principal early, when interest is figured by applying a rate to the unpaid balance.

Five lenders answer the question on their own pages:

Upgrade: "No prepayment fees," and extra payments can be made from the Upgrade dashboard.
LightStream: fixed-rate, simple-interest, fully amortizing installment loans with no fees or prepayment penalties.
Wells Fargo and Navy Federal: no prepayment penalty.
PenFed: no early payoff fee.

No penalty still leaves one question for the lender: whether an extra payment reduces principal right away or gets held as an early installment. The savings above assume the first.

Loans with interest built in from the start

Some loans are precomputed: the interest is calculated up front and added to what you owe. For those, Regulation Z requires the disclosure to say whether you're entitled to a rebate of the finance charge if you prepay.

Federal law adds a floor. Under 15 U.S.C. 1615, when a consumer prepays a loan in full, the creditor must promptly refund any unearned interest, unless the refund would be under $1. For precomputed loans with terms over 61 months signed after September 30, 1993, the refund has to be figured by a method at least as favorable to the borrower as the actuarial method, which rules out the Rule of 78s.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pricing pages on the dates shown. We have not used these products. Corrections: contact form.