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How Extra Loan Payments Work
Every extra dollar you pay toward a loan's principal reduces the balance on which interest is calculated. This creates a snowball effect — less principal means less interest each month, which means a larger portion of each regular payment goes toward principal, accelerating the payoff even further.
Strategies for Paying Off Loans Faster
- Round up payments: Rounding a $478 payment to $500 adds $22/month that all goes to principal.
- Biweekly payments: Paying half your monthly payment every two weeks results in 26 half-payments per year — equivalent to 13 full payments instead of 12.
- Apply windfalls: Tax refunds, bonuses, and gifts applied directly to principal can shave years off your loan.
- Refinance: If rates have dropped since you took out the loan, refinancing to a lower rate can reduce both your payment and total interest.
Which Loans Should You Pay Off First?
If you have multiple loans, use the avalanche method: pay minimums on all loans, then put extra money toward the highest interest rate loan. This minimizes total interest paid. Alternatively, the snowball method (pay off smallest balance first) builds psychological momentum.