How Extra Repayments Can Save You Thousands on Your Loan

One of the most powerful strategies for reducing the cost of a personal loan is also one of the simplest: making extra repayments. Even small additional payments can have a dramatic impact on the total interest you pay and how quickly you become debt-free. Understanding how extra repayments work and implementing a strategy that fits your budget can save you thousands of dollars over the life of your loan.

How Extra Repayments Reduce Interest

To understand why extra repayments are so powerful, you need to understand how loan interest is calculated. Interest on personal loans is typically calculated daily on your outstanding balance. Each day, the lender calculates how much interest you owe based on the current principal remaining.

When you make your regular monthly payment, a portion goes toward interest and the rest reduces your principal. In the early months of a loan, most of your payment covers interest, with only a small amount reducing the principal. As your principal decreases over time, more of each payment goes toward principal.

When you make an extra payment, the entire amount (or nearly all of it) goes directly to reducing your principal. This immediately lowers the balance on which interest is calculated, reducing the interest portion of all future payments. The compounding effect means that even modest extra payments made early in the loan term can have significant long-term impacts.

The Real Numbers: Extra Repayment Savings

Let's illustrate with a concrete example. Consider a $25,000 personal loan at 9% interest over 5 years:

Standard repayments only: Monthly payment of $519. Total interest paid over 5 years: approximately $6,140. Total cost: $31,140.

Extra $50 per month: Monthly payment of $569. Loan paid off in approximately 4 years and 2 months. Total interest paid: approximately $4,950. Savings: approximately $1,190, plus 10 months of freedom from payments.

Extra $100 per month: Monthly payment of $619. Loan paid off in approximately 3 years and 8 months. Total interest paid: approximately $4,100. Savings: approximately $2,040, plus 16 months of freedom from payments.

These savings are significant. An extra $100 per month—roughly $25 per week—saves over $2,000 and eliminates the loan more than a year early. The earlier you start making extra payments, the greater the impact.

Strategies for Making Extra Repayments

Round Up Your Payments: If your required payment is $519, round it to $550 or $600. The small difference is barely noticeable in your weekly budget but adds up significantly over time.

Pay Fortnightly Instead of Monthly: By paying half your monthly amount every two weeks, you make 26 half-payments per year—equivalent to 13 monthly payments instead of 12. This extra payment per year accelerates your loan repayment without dramatically impacting your regular budget.

Direct Windfalls to Your Loan: Tax refunds, work bonuses, birthday money, or proceeds from selling unused items can make excellent lump-sum loan payments. These one-time payments can shave months or even years off your loan.

Automate Extra Payments: Set up automatic transfers aligned with your pay cycle. If you're paid weekly, transfer a small extra amount to your loan each week. Automation removes the temptation to spend the money elsewhere.

Apply Raises to Your Loan: When you receive a salary increase, maintain your current lifestyle and direct the difference to your loan. You won't miss money you never had in your budget, and your loan will disappear faster.

Check Your Loan Terms First

Before implementing an extra repayment strategy, confirm that your loan allows additional payments without penalty. Most variable-rate personal loans in Australia allow unlimited extra repayments. However, some fixed-rate loans charge early repayment fees or limit how much extra you can pay.

Review your loan contract or contact your lender to understand any restrictions. Key questions to ask include:

• Are extra repayments allowed on this loan?
• Is there a limit on extra repayments?
• Are there fees for making extra payments?
• Can I access extra payments through a redraw facility if needed?
• Are there early termination fees if I pay off the loan before the scheduled end date?

If your current loan penalises extra payments, consider whether refinancing to a more flexible loan might be worthwhile. The savings from extra repayments could outweigh refinancing costs.

Balancing Extra Repayments with Other Goals

While paying off debt faster is generally positive, it shouldn't come at the expense of financial security. Before directing extra money to your loan, consider:

Emergency Fund: Do you have savings to cover unexpected expenses? If not, building a small emergency fund might take priority over extra loan payments. Otherwise, an unexpected car repair or medical bill might force you into high-interest debt.

High-Interest Debt: If you have other debts with higher interest rates—particularly credit cards—consider paying those first. Directing extra payments to your highest-interest debt provides the greatest mathematical benefit.

Retirement Savings: If your employer offers superannuation matching, ensure you're capturing that full benefit before making extra loan payments. Free employer money typically offers better returns than loan interest savings.

Once these basics are covered, extra loan repayments become an excellent use of spare funds.

The Psychological Benefits

Beyond the financial mathematics, extra repayments provide psychological benefits. Watching your loan balance decrease faster than expected is motivating. Knowing you'll be debt-free sooner reduces financial stress. And the discipline of making extra payments builds positive financial habits that serve you throughout life.

Each extra payment is a tangible step toward financial freedom. Use our personal loan calculator to model different extra repayment scenarios. See exactly how much you could save and how quickly you could become debt-free. The numbers might inspire you to find room in your budget for those extra payments.