Loan payoff calculator

How loan payoff works

Each monthly payment does two jobs. First it pays the interest that built up over the month: the balance times the annual rate, divided by 12. The rest of the payment goes to principal and brings the balance down. Next month's interest is charged on that lower balance, so a little less of each payment goes to interest and a little more to principal. That's amortization, and it's why the first payments on a loan are mostly interest and the last ones are almost all principal.

The loan is paid off when the balance reaches zero. The last payment is usually smaller than the others, because it only has to cover what's left.

A worked example

Take the numbers the calculator starts with: $15,000 at 7.5% APR, paying $350 a month.

1. Month 1. Interest is $15,000 × 7.5% ÷ 12 = $93.75. The other $256.25 of the payment goes to principal, which leaves $14,743.75.
2. Month 2. Interest on $14,743.75 is $92.15, so $257.85 goes to principal, which leaves $14,485.90.
3. Month 51. After 50 payments of $350, $14.13 is left. With nine cents of interest, the last payment is $14.22.

That's 51 payments, 4 years and 3 months. Over the loan you pay $2,514.22 in interest, $17,514.22 in all.

How extra payments save interest

Your regular payment already covers the month's interest, so every dollar of an extra payment goes to principal. A lower balance means less interest next month, which leaves more of your regular payment for principal the month after. The saving builds on itself until the loan is gone.

In the example, $100 extra makes the first month's principal $356.25 instead of $256.25. Month 2's interest is then $91.52 instead of $92.15. Sixty-three cents doesn't look like much, but it grows every month: with $100 extra, the loan is paid off in 38 payments instead of 51, 13 months sooner, and you pay $641.10 less in interest.

The longer the loan, the more an extra payment is worth. A $250,000 mortgage at 6.5% over 30 years takes $1,580.18 a month in principal and interest, and $318,853.86 in interest over 360 payments. Paying $200 more each month pays it off in 265 payments, nearly 8 years sooner, and saves $97,614.07.

Before you pay extra

• Make sure it goes to principal. Extra money should lower the balance now, not be held toward next month's payment. Check how your lender handles it, and ask if it isn't clear.
• Look for a prepayment penalty. Your loan agreement says whether paying early costs a fee.
• Pay the highest rate first. If you also carry a credit card balance at 22%, an extra $100 there saves more than it does on a 7.5% loan. The credit card payoff calculator shows how much.
• Keep some savings. Money sent to a loan is hard to get back. A small emergency fund keeps a surprise bill from going on a card.

About the math

Each month, interest is the balance × the APR ÷ 12, rounded to the nearest cent, and then the payment is applied. It's the same method UrBudget's loan planner uses. The calculator assumes the rate stays the same, nothing new is borrowed and there are no fees.

Many lenders charge interest by the day instead, for the exact days between payments, so your statement can differ from these figures by a few dollars. For the same reason, a payment quoted by a lender can leave a few cents for one extra month here; on a real loan the last payment is adjusted instead. If a payment doesn't cover the first month's interest, the calculator tells you the loan never gets paid off, and it stops at 100 years.

Everything is worked out in your browser. Nothing you type is sent anywhere.

In UrBudget

UrBudget's loan planner does the same with your real loan, next to the rest of your budget.

• It works from the loan's account, so the balance is what you still owe after the payments you've recorded.
• Enter the rate, the payment, any monthly fees or escrow and an extra payment, and it compares the two side by side: payments, payoff date, interest and fees, and the interest the extra saves, with the full amortization schedule.
• Pick a payoff date and it works out the monthly payment, like Pay it off by here.
• On a variable-rate loan, add each rate change by month, and projections use the new rate from then on.
• Record a payment and it's entered as a transfer to the loan, with that month's interest and fees. Pay extra later the same month and it all goes to principal; the month's interest isn't charged twice.
• It can set the payment category's target to the monthly payment, so the money is set aside every month.

• Credit card payoff calculator
• Car loan payoff calculator
• Debt payoff calculator: snowball vs avalanche
• Getting started with envelope budgeting