What impact can extra payments on a loan have on overall interest paid?

What impact can extra payments on a loan have on overall interest paid?

• A. They can increase the total interest paid
• B. They can significantly reduce the overall interest
• C. They have no impact
• D. They alter the payment schedule only

Answer: (B)

Making extra payments on a loan can significantly reduce the overall interest paid. This occurs because most loans, especially fixed-rate loans, calculate interest based on the remaining balance. When you pay extra, you are effectively lowering the principal balance of the loan more quickly. As the principal decreases, the amount of interest accrued over time also decreases, leading to a lower total interest cost over the life of the loan. In addition, making extra payments can potentially shorten the loan term, allowing you to pay off the debt faster. This not only saves money on interest but can also enable you to be free from the obligation sooner. Therefore, regular extra payments can be one of the most effective strategies for minimizing the overall cost of borrowing.

Making extra payments on a loan can significantly reduce the overall interest paid. This occurs because most loans, especially fixed-rate loans, calculate interest based on the remaining balance. When you pay extra, you are effectively lowering the principal balance of the loan more quickly. As the principal decreases, the amount of interest accrued over time also decreases, leading to a lower total interest cost over the life of the loan.

In addition, making extra payments can potentially shorten the loan term, allowing you to pay off the debt faster. This not only saves money on interest but can also enable you to be free from the obligation sooner. Therefore, regular extra payments can be one of the most effective strategies for minimizing the overall cost of borrowing.