Extra payment

What It Means

An extra payment is any amount you pay on a loan beyond the payment that's due. On an installment loanInstallment loanA loan you receive as one lump sum and repay in a set number of scheduled payments, such as a car loan, mortgage or personal loan. See more such as a mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more or car loanCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more, it usually goes toward the principal, the amount you still owe, so less interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more builds up in the months that follow and the loan ends sooner. You can make one every month, now and then, or once a year, as long as the loan allows it and the lender applies it to principal.

How People Say It

• "I round the mortgage up to the next hundred every month."
• "Put the extra toward principal, not next month's payment."
• "We threw the tax refund at the car loan."

The Breakdown

Worked example. A $250,000 mortgage at a fixed 6% with 30 years left has a required payment of $1,498.88. Buhata's month-by-month estimate of adding a fixed extra amount every month:

What the result means. An extra $100 a month adds $30,600 in payments over 25 and a half years and saves more than $51,000 in interest, because every extra dollar lowers the balance that interest is charged on from then on. The earlier the extra starts, the more it saves, since the balance and the interest on it are largest at the start of a loan.

Making sure it counts

1. Check your loan documents or ask your servicer whether extra payments are allowed and whether any prepayment penaltyPrepayment penaltyA fee some lenders charge if you pay off a loan, or a large part of it, before the end of its term, most often through a sale or a refinance. See more applies.
2. Mark the extra as a payment to principal, using the principal line on your payment slip or online form.
3. Check the next statement to confirm the principal went down by the extra amount.

Good to Know

Guidance from the Consumer Financial Protection Bureau, Fannie Mae and Freddie Mac makes the same two points: confirm that your loan allows extra payments, and make sure the money is applied to principal. The CFPB says prepayment penalties don't normally apply to small extra principal payments, though it's worth checkingChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more with your lender. On a credit card with balances at different rates, Regulation Z generally sends whatever you pay above the minimum to the highest-rate balance. Before sending extra to a low-rate loan, check that bills and any higher-rate debt are covered first.

Related Terms and Categories

• Amortization

  Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.

• Prepayment penalty

  A fee some lenders charge if you pay off a loan, or a large part of it, before the end of its term, most often through a sale or a refinance.

• Biweekly mortgage payment

  Paying half your monthly mortgage payment every two weeks, which adds up to 26 half payments, or one extra full payment, each year.

• Debt-free date

  The month your last debt is scheduled to reach a zero balance, based on the balances, interest rates and payments you plan to keep making.

• Mortgage

  A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.

Debt and credit