Extra repayments: how much interest and time do you save?

You transfer money for your loan every month. But what happens if you add an extra €50 or €100 to that? Making extra repayments can reduce your outstanding debt faster. As a result, for a loan with interest, you will pay less interest over the following period.

How much difference it makes depends on your outstanding debt, interest rate, monthly amount and terms.

What are extra repayments?

Extra repayments mean paying back money on top of your agreed monthly amount. This can be a one-off, for example with a portion of your holiday pay. You can also pay an extra amount every month.

Ask your lender how to arrange this. Also check whether it shortens your term, reduces your mandatory monthly amount or if you have a choice. In ABN AMRO’s described loan regulations for example, the monthly amount remains the same and the term becomes shorter. That example does not say how your own contract works.

What does an extra €100 per month achieve?

Suppose you still have €10,000 to pay back. You pay 8% nominal annual interest and normally €200 per month, including interest and principal.

With an extra €100 per month, you are finished 24 monthly payments earlier in this example. You save approximately €858 in interest.

The calculation starts with the mentioned outstanding debt. Every month, interest is first calculated at 8% / 12, then the payment follows. There are no extra costs, interest rate changes or new withdrawals. The final payment is smaller. Amounts and savings are rounded individually; therefore, a difference of €1 may occur when you subtract the shown amounts.

Why do you pay less interest afterwards?

In this example, the interest is calculated based on what you still have to pay back. In the first month, that is approximately €66.67. With a payment of €200, approximately €133.33 goes towards repayment. With €300, that is approximately €233.33.

Your debt is €100 lower after the higher payment. In the following month, no interest is calculated on that €100. If you continue to pay more, the difference from the original repayment plan grows.

A one-off extra payment or every month?

With a one-off payment, you reduce your debt immediately. With a fixed extra monthly amount, you work step-by-step towards a shorter term.

You can combine both. First, see what money you can afford to spare, so you don't have to borrow again for a next bill.

If you already have the amount available now and there are no extra costs or other restrictions, then repaying earlier prevents more interest than repaying the same amount later. But your buffer and upcoming expenses remain part of that choice.

What should you check before paying extra?

• Are you allowed to make extra repayments and are there costs involved?
• How should you make the payment so that it reaches the correct loan?
• Does your regular installment remain the same?
• Can you continue to pay your other bills and installments?
• Do you keep enough money available for unexpected expenses?

For the latter, you could use the Buffer Calculator from Nibud.

Frequently asked questions

Do extra repayments always yield an interest advantage?

With an interest-free debt, there is no interest to save. With an interest-bearing loan, you must also consider any costs for extra repayments. Therefore, compare the total costs of both situations.

Will my monthly amount decrease automatically?

That depends on your contract. Sometimes you continue to pay the same and finish earlier. Enquire about this before you adjust your monthly budget.

Which loan should I put the extra money towards?

Read which debt you should pay off first. In the meantime, continue to pay all agreed installments.

Also view the step-by-step plan for paying off debt.