Pay off the Principal

How to save money on payments

Our home buyer may have paid off their mortgage a total of five years early but what was the actual financial benefit or incentive in doing so if they were not able to save any actual money in the process? If there is no savings to be made, is there really a point in going through all of the extra work and not using the money for other more rewarding purposes instead?

Or perhaps there is a way to take that money and not only pay off the debt early but make some serious financial savings in the process. Perhaps if our client would have dug a little deeper or asked the proper questions, they would have been able to do all of this without having spent so much money in vain.

Pay off the principal

Let’s return for a moment to our oversimplified automobile buyer. In review, we know that they made a loan for the principal amount of ten thousand dollars with ten percent interest due annually.

We know that the first year they made twelve hundred dollars in payments and paid off one thousand dollars in interest and paid two hundred dollars on the actual amount of the loan on which the interest was being charged. If they followed the same ideas and made two additional payments each year, the end result would be the same.

If they only paid two additional payments every year, it would do nothing more than pay off the loan early and not result in any financial savings to them at all. However, if they made those two additional payments on the principal amount of the loan, let us look and see what would happen.

As it were, they owed nine thousand and eight hundred dollars in principal going into the second year of the loan. That means that at ten percent, they were still going to be paying nine hundred and eighty dollars in interest payments and only two hundred and twenty dollars on the principal amount of the loan.

Had those two additional payments been made on the principal of the loan, they would have paid a total of one thousand dollars in interest as they would normally, but they would have also paid off four hundred dollars on the principal amount of the loan. The end result would be that going into the second year, they now only owed nine hundred and sixty dollars in interest and they would now be paying off even more money on the principal of the loan with their normally scheduled payments.

Throw in on top of that the two additional payments each and every year and over the course of the life of the loan, the savings add up quickly, dramatically and effectively to provide some real financial incentives for paying off a loan early. When those same adjustments are made to the much larger loans on mortgages or even business loans, it can be easy to see how the savings and the benefits grow exponentially over the course of the loan.

In this manner, not only will the loan be paid off quite a bit sooner, but the additional savings can then be reinvested in the business, the home or even to start completely new endeavors in order to further expand your financial realm of control. If only our person would have gained a little bit more knowledge instead of acting on “something that they heard” they would have been able to benefit greatly. As it was, they did not really save anything at all and made none of the financial progress that they should have.

It should be noted that many financial institutions charge additional fees or penalties when a loan holder makes payments in this method. Care should be taken not only to avoid such loans and banks that charge these fees but also to fully investigate these fees before attempting to pay off any loan early.

Usually these matters can be cleared up with a brief conversation with any of the loan officers at the financial institution in question. However, if questions remain, it may be advisable to contact a financial professional in order to remove any and all doubts before trying to get the loan or pay it off early.