Here’s a picture of how the extra, $22.60 helps pay down the $1,500 faster than you would have if you had just continued to make the minimum payments on this loan. It’s paid-off in two years. If you don’t believe me, look at the second picture and you will see that it takes you three years to payoff that loan without the extra $22.60.
If you decide to not pay the extra $22.60 per month, you tack on another year. If you pay the extra $22.60 per month, you only pay $108.86 in interest. However, if you continue to pay the minimum balance, than you pay $167.36 in interest. The extra $58.50 might not seem like a lot of money. However, if this is happening, which it is, on your other debt you are throwing away your hard-earned money.After you have paid-off this first loan, it’s time to attack your next loan with the lowest balance. In our example the next loan has a balance of $4,000. Take the $68.92 you were paying on your $1,500 loan and add it to the $77.40 you were paying on the $4,000. You are now going to be applying $146.32 to your debt. However, the $68.92 is going to go directly to the principle amount of the loan and not to interest. The next two pages show you the pay-off with the extra payment and without the extra payment.
With the extra payment every month, you pay it off in three years and seven months. Also, your total interest paid is $544.59. However, if you do not apply the extra money, then it takes you five years to pay-off the loan and you pay $643.78 in interest over that five year period. The next two pages show you this information.