Valam
Early in a loan, most of each EMI goes toward interest. That is why extra payments made early have an outsized effect. Understanding this can save you a meaningful sum.
How an EMI is split
Each month, interest is charged on the outstanding balance. The rest of your EMI reduces the principal. As the balance falls, interest falls too, and more of the EMI goes to principal.
Two ways to use extra money
- Reduce the tenure: keep the same EMI and finish earlier. This usually saves the most interest.
- Reduce the EMI: keep the same end date and lower the monthly burden. This helps cash flow but saves less interest.
Which loan to attack first
If you have several loans, the avalanche method targets the highest interest rate first and saves the most money. The snowball method clears the smallest balance first and can feel more motivating. Pick the one you will stick with.
Check before you prepay
Ask your lender about prepayment charges and keep an emergency fund before sending large lump sums. Paying off cheap debt while holding expensive debt is rarely the best use of cash.
The payoff planner in Valam compares strategies and shows your debt free date, so you can see what an extra payment is worth.
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