Paying off loan early

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I am no good at this stuff so just wondering.. let's say I have a variable loan over 4 years and the interest is for example €2000. If I pay off the loan in 2 years will that mean I just pay €1000?

BazzaDP

Kind off. Though the numbers are not exactly half depending on how you pay off the loan after two years.

The €2000 interest is calculated under the assumption you make equal payments to pay off the loan (and the interest on that loan) over 4 years.

Interest is usually calculated daily. At the beginning you're paying interest on the full loan, at the end you've most of the loan paid off so are paying interest on a very small amount. So earlier payments are mostly interest and later payments are mostly paying off the loan.

So after two years you won't have paid off half your loan but slightly less than half. However as the interest for the 3rd and 4th year will be on a smaller loan amount you catch up on the under payment from years 1 and 2 and still pay it off in the original 4 years.

So if you pay as normal for 2 years and then pay the remainder as a lump sum then you'll end up paying a bit more than half the interest. Say €1200 for example.

Then again, if you pay double each month, you'll be cutting the loan earlier and so won't end up paying as much interest as the bank originally calculated and so you'll have it paid off earlier than two years and pay LESS than €1000 interest.

A bit complicated but hopefully that makes sense.

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BazzaDP wrote: »

Kind off. Though the numbers are not exactly half depending on how you pay off the loan after two years.

The €2000 interest is calculated under the assumption you make equal payments to pay off the loan (and the interest on that loan) over 4 years.

Interest is usually calculated daily. At the beginning you're paying interest on the full loan, at the end you've most of the loan paid off so are paying interest on a very small amount. So earlier payments are mostly interest and later payments are mostly paying off the loan.

So after two years you won't have paid off half your loan but slightly less than half. However as the interest for the 3rd and 4th year will be on a smaller loan amount you catch up on the under payment from years 1 and 2 and still pay it off in the original 4 years.

So if you pay as normal for 2 years and then pay the remainder as a lump sum then you'll end up paying a bit more than half the interest. Say €1200 for example.

Then again, if you pay double each month, you'll be cutting the loan earlier and so won't end up paying as much interest as the bank originally calculated and so you'll have it paid off earlier than two years and pay LESS than €1000 interest.

A bit complicated but hopefully that makes sense.

Thanks for the explanation! I was thinking of putting extra money in a savings account and paying a lump sum off every 6 months and have it paid off in 2 years, but it looks like it would be better for me to pay it off small amounts every couple of weeks instead.

BazzaDP

Correct. Assuming there's no early repayment charge or a need to potentially get the money back out of the loan again.