Paying off a Personal Loan
This calculator can be used to determine how quickly a personal loan can be paid off by making extra payments each month. The calculator requires several inputs by the user, including:
- The initial loan amount, or original size of the personal loan
- The term of the loan in years
- The annual interest rate charged on the loan
- The remaining principal on the loan. This information is provided by lenders each month. If this is a new loan, then the remaining principal would be equal to the original loan amount
- The additional amount to be paid each month to accelerate paying off the loan
The calculator then provides the user with a total of eight data points:
- The current monthly payment, which is based on the initial loan amount, term, and interest rate supplied earlier
- The current number of months remaining on the loan if no additional monthly payment was made
- The new payment amount, which is the sum of the current monthly payment plus the additional monthly payment
- The number of months remaining on the loan if an additional monthly payment was made
- The money saved by making the additional payment. Since the loan is paid off early, this savings comes from a reduction in the interest charges on the loan
- The number of months saved by making the additional monthly payment
- Finally, the pie chart shows the user both the number of remaining monthly payments and the number of months saved by making the extra payment each month
Paying off a personal loan early
A personal loan payoff calculator of this type is often used by individuals that might find themselves with discretionary income and would like to shorten the term of their loan. For example, a spouse or partner may have recently returned to work or someone in the household received a significant raise in pay. A portion of this additional income can then be used to help pay down the loan.
When does it make sense to pay down or pay off a loan?
Just because someone can afford to pay off their loan doesn’t automatically make it a good idea. Many “experts” explain that paying off the balance of a loan will help you save money in the long run. And that the longer you’re stuck paying off a personal loan, the more you’ll pay in financing, or interest, charges. While this statement is true, paying of the loan may not be your best option.
Given the fact the interest charges on personal loans are no longer tax deductible in most jurisdictions, there is a simple rule of thumb you can use to determine if paying off the loan makes sense: Treat your loan like it was an investment.
Whenever you have discretionary income, you are either consciously or unconsciously deciding where to invest the money. Are you saving cash for a rainy day? Then you might be investing in your savings account. Are you thinking about putting more money in a 401(k) or similar retirement plan? Then you might be investing in a mutual fund. Whenever you have discretionary income, you have a choice where to invest that money. If you’re paying 5.00% on a personal loan and you can earn an average of 10.80% in the stock market, then it might be a better idea to invest that discretionary money in the stock market. If you have credit card debt at 16.0%, then you may want to put that money to use by investing in your credit card debt.