The Best Way to Apply Extra Payments (DRS #3)

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This is the 3rd post in the Debt Repayment Plan Series! If you’re new to this series, start here.

Another important part of creating a debt repayment plan is knowing how extra payments will affect the life of your payments. This is incredibly important because this can make a pretty significant difference in the life of your loan. Extra payments are everything when it comes to paying off debts early. But are you using the best approach?

What Extra Payments?

I work pretty hard to save money through different means, including hiding money from myself, using a round-up app, and monitoring my spending. The purpose of me saving that money is not only to build my savings account, but also to help pay down my debts. Originally, I planned to pay one lump sum at the end of the year.

After I started entering in the information into my debt reduction calculator, I realized paying a lump sum was not the best option. I learned if I spread the total amount out over the course of the year, I would reduce my overall interest and life of my loan.

Now before I jump into my personal example, we need to go over a few things.

  1. Making extra payments monthly, or any extra payments at all, will make a difference in your repayment plan.
  2. Right now we have two mortgages because we have not sold our previous house, so we are only paying a little above the minimum until our old house is sold.
  3. You can repay your loans with any strategy that fits you well.
  4. All examples shown can be applied to either the Snowball Method or the Avalanche Method.
    1. Both examples have the lowest balance debts with highest interest rate and vice versa.
  5. If you want to use the same spreadsheet I do, please download it here.

The Best Way to Apply Extra Payments


Personal Example

Here is the original estimated payoff plan for my current debts:

If I add a $5,000 payment in December:

Lump Payment

I will save myself $6,492.86 in interest and move my payoff date up 15 months.


If I spread out the payments:
Monthly Extra
I save myself $6,561.14 in interest with a payoff date in. That’s an extra $68.28 saved on interest! That may not seem like a lot, but if that is spread out over the course of the loan (~$416/month), this is what the pay off will look like:

Long Term Snowball Payments

That’s $47,079.36 and 152 months, or 12 years and 8 months.

Now, I realize an extra $400+ a month is not a realistic goal for most people, especially long-term. But even a little extra each month helps. Here’s a much smaller example of adding just $25 extra per month:

Small Snowball 25

It still saves $13,569.81 in interest and drops the pay off date by almost 2 years. Every little bit helps.

Obviously, it goes without saying that the best time to add extra payments towards debt is as soon as possible. Immediately. Now.


Example 2

Now I realize my personal example might not be the most helpful to you. As a result, I’ve created an example, and provided examples of how adding even a small amount above the minimum payment can really pay off.
This example includes a credit card balance of $9,000, a student loan balance of $30,000, and a mortgage of $100,000:

Original Payments

Total Interest: $87,767.78


Extra $20

20 Extra

Total Interest: $82,200.61


Extra $30

30 Extra

Total Interest: $79,779.93


Extra $40

40 Extra

Total Interest: $77,532.33


Extra $50

50 Extra

Total Interest: $75,449.05


Extra $75

75 Extra

Total Interest: $70,805.58


Extra $100

100 Extra

Total Interest: $66,801.29


As you can see from the chart above, even an extra $20 a month can be a HUGE difference overall.

  • Paying just $20 above the minimum payment saves you a total of $5,567 in interest and knocks years off the life of your debts.
  • Paying $100 above the minimum saves you $20,966.49 in interest and makes your overall payoff date years soonerr!


Best Practices

The absolute best practice for paying off debts is to always pay more than the minimum payment. If you can’t manage that on a consistent basis, don’t fret. Any extra payments you can make along the way will reduce the life of and total interest on your loans.
If you’re doing a personal challenge to apply as much as possible to a debt, be sure to pay as you go because it will make a difference.
Now go forth and save, my lovelies!
Applying Extra Payments

How do you apply extra payments?

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