Loans like services are used everywhere, from making big purchases to covering up short-term spending, and so we’ve learned from adolescence that borrowing is beneficial and is done by most people. The more loans are taken, the more profit banks and private credit companies make, because all these loans are paid interest, and the longer you do not return the debt, the more money the creditor receives from you. Most consumers borrow money afterwards with only minimal credit payments, making them monthly, and not even thinking that in this way, in the long run, a very impressive amount of money is lost. So let’s look at why today it is better to repay the loan as soon as possible rather than just paying the minimum payments. I’ll give you an example of a loan that a person could borrow, which will be a 5000 Euro loan.
Such a loan could be used either to buy a car or to carry out repairs or even to start a small business. I set the interest rate on the loan at 10% per annum when it would be for most banks and maybe less than average. And then let’s look at 4 different options, where the first person will pay 100 Euro each month, the second 150 Euro, the third 200 Euro and the fourth 300 Euro. It is also important to know that this loan repayment is accompanied by interest payments from the remaining principal of the loan using the falling interest rate scheme.
If you pay 100 Euro per month, you will be able to repay 5000 Euro in 50 months, or a little longer than 4 years, and then your average monthly repayment amount will be 142 Euro, but every month it will decrease by 1 Euro and at the end of the last month you will only have to pay 101 Euro. In this way, you will overpay as a percentage of 1062.5 Euro and the total creditor will have given you 6062.5 Euro with an initial 5,000 Euro loan.
If you are going to pay 150 Euro per month from the principal amount of the loan and interest is still due, then your monthly payment amount will be 192 Euro, and every month it will decrease by 1.5 Euro on average, until the end of the year is only 152 Euro. If you pay this way, you will repay the creditor in total to 5715 Euros, which means that the overpayment will be only 715 Euro, but you will repay the loan in 35 months!
If you choose to pay 200 Euro per month plus interest then the loan will be repaid in 26 months, but the initial loan payment will be 242 Euro and it will decrease by 2 Euro per month and in the last month will be only 202 Euro. In total, you will pay 5542 Euro to the creditor, which means that the credit will be only 542 Euro.
If you can afford to pay 300 Euro per month plus interest, you will be able to repay a loan of 5000 Euro already in 18 months and initially pay 342 Euro, but the last payment will be only 202 Euro. With such a payment schedule, you will only pay back a total of 5368 Euro, so the overpayment will be only 368 Euro.
As you can see from the calculations in the chart, the more you pay per month, the lower your total paid interest and if you can, for example, double your monthly payment every month, your final loss will be halved, as shown in these calculations. Paying this uniform amount every month will definitely make no difference or you pay 100 or 200 Euros, but as you can see from the calculations, the difference is that in the first variant you will pay 1062.5 Euros in percentage of the top 5,000 Euro, and in the second case only the With 542 Euro and thus increasing your monthly payment by half you can save up to 500 Euros! And imagine how much savings will you make if you increase your repayment rate for a long-term Mortgage loan?