What effect do extra payments on your loan have on the principal?

What effect do extra payments on your loan have on the principal?

• A. They can increase the overall loan amount
• B. They can help pay down the principal faster
• C. They have no effect on the principal
• D. They mainly reduce future interest rates

Answer: (B)

Making extra payments on your loan directly reduces the principal balance. When you pay more than the scheduled monthly payment, that extra amount is applied to the original loan balance, thereby decreasing the total amount owed. As the principal balance lowers, you also reduce the interest that accrues over time, since interest is calculated based on the remaining principal amount. This means that not only does making extra payments help pay off the loan faster, but it can also lead to significant savings on accruing interest, resulting in paying off the loan more efficiently. This principle highlights the advantages of making additional payments, as it promotes faster equity building in your home and can lead to loan payoff in a shorter time frame.

Making extra payments on your loan directly reduces the principal balance. When you pay more than the scheduled monthly payment, that extra amount is applied to the original loan balance, thereby decreasing the total amount owed. As the principal balance lowers, you also reduce the interest that accrues over time, since interest is calculated based on the remaining principal amount. This means that not only does making extra payments help pay off the loan faster, but it can also lead to significant savings on accruing interest, resulting in paying off the loan more efficiently.

This principle highlights the advantages of making additional payments, as it promotes faster equity building in your home and can lead to loan payoff in a shorter time frame.