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Guide answer

Why early loan overpayments save more

An overpayment saves interest in every later period in which that money would otherwise have remained in the balance. Pay 1,000 extra near the start of a long loan and the lender loses years of monthly interest on that 1,000; pay it one month before the end and only one charge disappears. The rate has not changed—the number of future periods exposed to it has. Check for prepayment penalties before treating the mathematical saving as the amount the contract will actually let you keep.

What to take away
  1. The saving compounds in reverse because each avoided interest charge also stops becoming part of a later balance.

  2. The same overpayment has more leverage when the term is long and the remaining rate is high.

  3. A fee or penalty can erase the saving, so compare the contractual settlement figure rather than only the schedule.

The full explanation

Compound interest and loan repayment look like separate topics and are the same arithmetic viewed from opposite ends. Once you can see a loan as a savings balance running backwards, the things that surprise people about mortgages — why the first years barely touch the principal, why a small rate change moves the total so much — stop being surprising. Read the complete guide for the reasoning, examples and definitions behind this answer.

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