What happens when I make extra payments?

Problem 1: regular payments

On January 1st, 2004, you borrowed $1,000 which is to be paid of in 240 monthly installments starting on February 1st, 2004. Interest is at 8 % compounded annually.

Suppose that you pay an extra $10 every month.

What will happen?

Solution 1: regular payments

Set up the following cash flow or open the "Loan - Payment" example in the Help examples folder.

Comment	Type	Occurs	Date	Amount	Occurrences	Change	Step
Loan	outflow	once	1-1-2004	1,000
Payment	unknown	monthly	2-1-2004	1	240	(no change)

Enter 8 into the rate field and select annual compounding.

Check the auto update checkbox: the multiplication value field indicates the monthly loan payment or 8.19.

Switch to the Amortization pane and change the multiplication value to 18.19: the loan will be paid off on January 10th 2009.

 

Problem 2: irregular payments

On January 1st, 2004, you borrowed $1,000 which is to be paid of in 240 monthly installments starting on February 1st, 2004. Interest is at 8 % compounded annually.

Suppose that you make two extra payments: you pay $20 on July 5th 2004 and $10 on February 19th, 2005.

What will happen?

Solution 2

Set up the following cash flow or open the "Loan - Extra payments" example in the Help examples folder.

From the "Loan - Payment" example we know that if the payment series starts on February 1st, 2004, the monthly payment would be $8.19.

Comment	Type	Occurs	Date	Amount	Occurrences	Change	Step
Loan	outflow	once	1-1-2004	1,000
Payment	inflow	monthly	1-1-2004	8.19	240	(no change)
Extra payment	inflow	once	7-5-2004	20
Extra payment	inflow	once	2-19-2005	10

Enter 8 into the rate field and select annual compounding. Make sure that auto update is checked.

To find out what difference the payments make, switch to the Amortization schedule pane.

You'll see that now the loan is paid of on October 1st, 2022, instead of on January 1st, 2024: that's fifteen months earlier!