Is early loan repayment worth it?

Why an extra payment saves interest

With an annuity loan, each month's interest is charged on the remaining balance. An extra payment reduces that balance immediately — from then on, every month accrues less interest, and a larger share of the same instalment repays principal.

That's why the saving isn't one-off: a lump sum early in the loan keeps working for all the remaining months. The same payment near the end saves far less, because there's barely any interest left to avoid.

Example: 5,000 KM against a remaining 30,000 KM

remaining 30,000 KM · 6% · 60 instalments of 579.98 KM → 5,000 KM lump sum, same payment → paid off in 49 instalments · saving 1,571.53 KM

Say you owe 30,000 KM at a 6% nominal rate with 60 instalments to go — the payment is 579.98 KM, and you'd pay another 4,799.04 KM of interest by the end.

Pay in 5,000 KM and keep the same 579.98 KM instalment, and the loan closes in 49 instalments instead of 60 — 11 fewer — with total interest dropping to 3,227.52 KM. The saving: 1,571.53 KM.

Shorter term or lower payment?

After a lump sum, banks typically offer two options: keep the same payment with a shorter term, or keep the term and lower the payment. The choice changes the saving substantially.

In the same example, lowering the payment instead gives a new instalment of 483.32 KM over the remaining 60 months — but the interest saved is only 799.84 KM, roughly half. The debt shrinks more slowly, so interest works against you for longer. If your budget can handle the current payment, the shorter term is almost always the better deal.

Check the fee before you pay

Some banks charge a fee for early repayment — the amount and conditions depend on your contract and loan type, and consumer-credit regulations cap it. Before paying, check your contract or ask the bank for the exact figure, then compare it with the calculated interest saving: the payment is worth it when the saving exceeds the fee.

Think about your cash buffer too: an extra payment locks money into the loan. If you have no savings for emergencies, it can be smarter to keep part of the money and pay in the rest.