Paying off loans early, or is there some way to reduce extortionate interest charges?
It really depends on the terms of your loan. For example, some loans have a pre-payment penalty. You will just have to ask your lender to know for sure. That said. In almost all cases, you can save considerable interest by making extra payments towards the principal. Be careful though, some lenders require you to specifically mark the payment to be applied to the loan principal and if you don't designate it as such, they will just apply it as an early payment for future months and not reduce your balance until that future payment is due, which doesn't help at all. Another option to reduce your total interest costs, though more common for larger loans like mortgages, is to split the payment into multiple parts and pay more than once a month instead of a single payment each month. This only works if they calculate interest daily and would be useless if they do it monthly. They key is knowing the terms of your loan. Despite it not being in their best interest (pun intended), most lenders will work with you on a strategy to help you minimize the interest cost in the name of customer service. "My husband made a similar car loan decision when he was younger and didn't have an established credit history / favourable credit rating.  As a result, he ended up paying triple what the car was worth, because of the interest. When we consolidated our finances, this ugly loan was first on our list of priorities to change, convert, eliminate, but unfortunately, in our case, the terms of the loan were such that only the lender benefited.  There was no incentive to pay off the loan early, in fact, we would have to have paid all the future interest at once, without saving a penny. So check the terms of your loan - hopefully you're better off than we were.  In our case, the only upside we could figure was the lesson of ""live and learn""!"
It used to be much more common, particularly for sub-prime loans. If you do run into someone offering a loan with a prepayment penalty, you should certainly consider other options. If you keep the monthly payment the same, and the interest is lower; then you will be by definition overpaying the new loan therefore it will be paid off sooner. Based on some quick calculations it will be paid off approximately 5 years sooner. One advantage to the new loan is that you will have flexibility, you can drop the payment to the lower level for a few months because of a big financial problem and not be in default. "The short answer is ""yes"", paying more towards the loan as soon as a you can will reduce the interest. There are calculators or you could work up a spreadsheet using the specialized family of functions: PMT, PPMT, IPMT. My personal view: The amount of interest you offset in this manner is going to be fairly small (I'm going to guess less than $5 or $10 a month, but I haven't done the math). I would say what is more important is to automate your payments at a comfortable level, while making sure your other obligations are taken care of. Then add an extra payment when you save up a chunk of money to pay towards it. Make sure you never miss a payment. That means making sure you set up emergency fund to cover the payments if you lose your job or need to visit a sick family member for a while or the car breaks down or ...." Based on your numbers, it sounds like you've got 12 years left in the private student loan, which just seems to be an annoyance to me.  You have the cash to pay it off, but that may not be the optimal solution. You've got $85k in cash!  That's way too much. So your options are:  -Invest 40k -Pay 2.25% loan off -Prepay mortgage 40k Play around with this link: mortgage calculator Paying the student loan, and applying the $315 to the monthly mortgage reduces your mortgage by 8 years. It also reduces the nag factor of the student loan. Prepaying the mortgage (one time) reduces it by 6 years. (But, that reduces the total cost of the mortgage over it's lifetime the most) Prepaying the mortgage and re-amortizing it over thirty years (at the same rate) reduces your mortgage payment by $210, which you could apply to the student loan, but you'd need to come up with an extra $105 a month. "I'm in my 40's, and fully paid off the mortgage early.  My ex would have preferred that I'd given it to her as spending money instead.  It can be said that since interest rates after year 2000 went down not up, I am a mug to have paid off early when perhaps I could have just bought more stuff like everyone else does.  I looked at the 1970 to 1990 average interest rate; about 10%, and thought that it would be imprudent to have a big debt which would be crippling at 10 or 15% interest rates, so I paid it off while I could. A factor to consider is how you expect your own income to change over the next decade.  If you work in shops, call centres, taxi driving, import warehousing, language translation, news writing, or anything which can be offshored or automated, then either the expectation of your salary diminishes towards the worldwide typical, or if it goes below £7.50 per hour typical then your employer goes bust.  Or blags a subsidy.  That is, I am a pessimist and would pay off early while possible.  I don't know chinese for ""he's not here"" to say to the debt collector." "Wow, you guys get really cheap finance. here a mortage is 5.5 - 9% and car loans about 15 - 20%. Anyway back to the question. The rule is reduce the largest interest rate first (""the most expensive money""). For 0% loans, you should try to never pay it off, it's literally ""free money"" so just pay only the absolute minimum on 0% loans.  Pass it to your estate, and try to get your kids to do the same.  In fact if you have 11,000 and a $20,000 @ 0% loan and you have the option, you're better to put the 11,000 into a safe investment system that returns > 0% and just use the interest to pay off the $20k. The method of paying off the numerically smallest debt first, called ""snowballing"", is generally aimed at the general public, and for when you can't make much progress wekk to week.  Thus it is best to get the lowest hanging fruit that shows progress, than to try and have years worth of hard discipline just to make a tiny progress.  It's called snowballing, because after paying off that first debt, you keep your lifestyle the same and put the freed up money on as extra payments to the next target.  Generally this is only worth while if (1) you have poor discipline, (2) the interest gap isn't too disparate (eg 5% and 25%, it is far better to pay off the 25%, (3) you don't go out and immediately renew the lower debt.  Also as mentioned, snowballing is aimed at small regular payments.  You can do it with a lump sum, but honestly for a lump sum you can get better return taking it off the most expensive interest rate first (as the discipline issue doesn't apply). Another consideration is put it off the most renewable finance.  Paying off your car... so your car's paid off.  If you have an emergency, redrawing on that asset means a new loan.  But if you put it off the house (conditional on interest rates not being to dissimilar) it means you can often redraw some or all of the money if you have an emergency.  This can often be better than paying down the car, and then having to pay application fees to get a new unsecured loan.   Many modern banks actually use ""mortgage offsetting"" which allows them to do this - you can keep your lump sum in a standard (or even fixed term) and the value of it is deducted ""as if"" you'd paid it off your mortgage.  So you get the benefit without the commitment.  The bank is contracted for the length of the mortgage to a third party financier, so they really don't want you to change your end of the arrangement.  And there is the hope you might spend it to ;) giving them a few more dollars.  But this can be very helpful arragement, especially if you're financing stuff, because it keeps the mortgage costs down, but makes you look liquid for your investment borrowing." It looks like the rate on that first loan is 6-2/3%?  When I look at $72000 principal and a $500 payment, I'm seeing a long term, 24 years. Not 60, but not good either.  Yes, as you pay a bit of principal, the next payment has less interest and even more principal.  I hope your degree is in a field that's lucrative. Or that you're able to get a job that qualifies you for loan forgiveness over time. I'm sorry that advice might seem weak, but aside from that, the best I can offer is to live well beneath your means, i.e. continue to live like a student, and make additional payments.  As far as bi-weekly goes, the lender may not accept partial payments. Set aside the money every two weeks and when you have extra money just make an extra payment amount toward principal.  To pay this off as fast as possible, I'd make as high an extra payment as I could each month to the loan with the higher rate. If the rates are the same, pay it off to the one with the lower balance.  With respect to the debt snowballers, followers of The David, say the rates are simply close, say .25% apart, with the lower balance having the lower rate. If you were to pay this one first, it would occur sooner, of course, and free up that monthly payment, helping your cash flow. But, it comes at a cost.  Note - if, as Noah suggests, the rates are the same, I'd advise to make all extra payments toward the lower balance. That will get you to the point where you've freed up that cash flow for other purposes, whether it's to focus on the higher loan, or anything else you need this for. I recently paid-off $40k in student loan debt. One of the motivations for me to accelerate my payments was that over time, as my income increased, the amount of student loan interest I could write-off on taxes started to phase-out. If there's no prepayment penalty, and if the extra is applied to principal rather than just toward later payments, then paying extra saves you money. Paying more often, by itself, doesn't. Paying early within a single month (ie, paying off the loan at the same average rate) doesn't save enough you be worth considering Depending on your bank you may receive an ACH discount for doing automatic withdrawals from a deposit account at that bank. Now, this depends on your bank and you need to do independent research on that topic. As far as dictating what your extra money goes towards each month (early payments, principal payments, interest payments) you need to discuss that with your bank. I'm sure it's not too difficult to find. In my experience most banks, so long as you didn't sign a contract on your mortgage where you're penalized for sending additional money, will apply extra money toward early payments, and not principal. I would suggest calling them. I know for my student loans I have to send a detailed list of my loans and in what order I want my extra payments toward each, otherwise it will be considered an early payment, or it will be spread evenly among them all. Forget about terms.  Think about loans in terms of months.  To simplify things, let's consider a $1000 loan with .3% interest per month.   This looks like a ten month term, but it's equally reasonable to think about it on a month-to-month basis.  In the first month, you borrowed $1000 and accrued $3 interest.  With the $102 payment, that leaves $901 which you borrow for another month.  So on and so forth.   The payoff after five payments would by $503.54 ($502.03 principal plus $1.51 interest).  You'd save $2.99 in interest after paying $13.54.  The reason why most of the interest was already paid is that you already did most of the borrowing.  You borrowed $502.03 for six months and about $100 each for five, four, three, two, and one month.  So you borrowed about $4500 months (you borrowed $1000 for the first month, $901 for the second month, etc.).  The total for a ten month $1000 loan is about $5500 months of borrowing.  So you've done 9/11 of the borrowing.  It's unsurprising that you've paid about 9/11 of the interest.   If you did this as a six month loan instead, then the payments look different.  Say  You borrow $1000 for one month.  Then 834 for one month.  So on and so forth.  Adding that together, you get about $168.50 * 21 or $3538.50 months borrowed.  Since you only borrow about 7/9 as much, you should pay 7/9 the interest.  And if we adding things up, we get $10.54 in interest, about 7/9 of $13.54.   That's how I would expect your mortgage to work in the United States (and I'd expect it to be similar elsewhere).  Mortgages are pretty straight-jacketed by federal and state regulations.   I too once had a car loan that claimed that early payment didn't matter.  But to get rid of the loan, I made extra payments.  And they ended up crediting me with an early release.  In fact, they rebated part of my last payment.  I saved several hundred dollars through the early release.  Perhaps your loan did not work the same way.  Perhaps it did.  But in any case, mortgages don't generally work like you describe. If you want to pay them off as quickly as possible, pay the minimum payment on the larger two and dump as much as you can into the one with the 8.75% interest.  Then, even though it has a slightly lower interest rate, I would attack the one with the next smallest balance after that, while continuing to make the minimum payment on the one with the largest balance. The hard and fast rule is to pay off high interest loans first, but each individual's situation is different so there are some things to consider. Student loan interest is tax deductible up to $2,500.  Will your student loan interest exceed $2,500 for the year?  If so I would try to pay down the student loan first to bring down the total interest for the year so that you get as much interest back as possible on your tax return.  Also, it may be beneficial to pay off the car first to close that account so that you are only left with the 1 loan.  Once you have the car loan payment out of the way you can dedicate that amount to paying off the student loan. I'm in almost the same situation as you.  I currently have a mortgage and car payment.  In 6 months my grace period will be over, and my student loan payments will start.  I have $100k in student loan debt.  So I will have a $1,100 mortgage payment, $1,100 student loan payment, and $700 car payment (car loan is 0%).  I don't want to have 3 loans active so I will pay off my car loan in a 2-3 months to get that out of the way.  Then I will pay down my student loan by paying $700 extra every month. I would strongly encourage you to either find specifically where in your written contract the handling of early/over payments are defined and post it for us to help you, or that you go and visit a licensed real estate attorney. Even at a ridiculously high price of 850 pounds per hour for a top UK law firm (and I suspect you can find a competent lawyer for 10-20% of that amount), it would cost you less than a year of prepayment penalty to get professional advice on what to do with your mortgage. A certified public accountant (CPA) might be able to advise you, as well, if that's any easier for you to find. I have the sneaking suspicion that the company representatives are not being entirely forthcoming with you, thus the need for outside advice. Generally speaking, loans are given an interest rate per period (such as yearly APR), and you pay a percentage (the interest) of the total amount of money you owe (the principle). So if you owe 100,000 at 5% APR, you accrue 5,000 in interest that year. If you pay only the interest each year, you'll pay 50,000 in interest over 10 years - but if you pay everything off in year 8, at a minimum you'd have paid 10,000 less in interest (assuming no prepayment penalties, which you have some of those). So paying off early does not change your APR or your principle amount paid, but it should drastically reduce the interest you pay. Amortization schedules don't change that - they just keep the payments even over the scheduled full life of the loan. Even with prepayment penalties, these are customarily billed at less than 6 months of interest (at the rate you would have payed if you kept the loan), so if you are supposedly on the hook for more than that again I highly suspect something fishy is going on - in which case you'd probably want legal representation to help you put a stop to it. In short, something is definitely and most certainly wrong if paying off a loan years in advance - even after taking into account pre-payment penalties - costs you the same or more than paying the loan off over the full term, on schedule. This is highly abnormal, and frankly even in the US I'd consider it scandalous if it were the case. So please, do look deeper into this - something isn't right! Until we get free returns from all online retailers, I am still shopping at malls and physical stores. Some stuff just doesn't fit you and retailers don't offer enough measurements to really do you justice. The most important thing in clothes is fit, and you have to try something on to validate that.