# Overpaying your loan?

## Find out if it’sworth it!

worth it

## showloan.info is a modern loan/credit calculator that quickly and accurately calculates loan payments, including personal or mortgage loans.

## See how much you can save by overpaying your loan. Or maybe it's better to invest? Compare loan overpayment benefits with alternative returns from investment

Make smarter financial decisions using hard data.

investment

The loan

for

interest rate

I overpay monthly

To pay

Without overpayments: 1.041.951,90 $

With overpayments: 860.974,67 $

## Why overpay your loan?

A loan overpayment is an extra, voluntary payment that reduces your outstanding debt. Depending on the loan terms, borrowers can make one-time or regular overpayments (e.g., monthly). In most cases, overpayments are free of extra charges.

The overpaid amount reduces the remaining principal. Overpayments can shorten the loan term and/or lower future monthly payments. By repaying the principal faster, overpayments lead to savings on the interest paid to the bank.

The overpaid amount reduces the remaining principal. Overpayments can shorten the loan term and/or lower future monthly payments. By repaying the principal faster, overpayments lead to savings on the interest paid to the bank.

## Overpay or invest?

The benefit of repaying your loan faster with overpayments is the savings on interest. Overpaying a loan is then a form of investment that yields returns in the form of reduced interest paid to the bank. Alternatively to that, profit can be generated by investing in popular financial instruments, such as:

- bank deposit - invest a fixed amount (e.g., 1000 PLN) for a set period (e.g., 12 months) with a financial institution (e.g., a bank). At the end of the term, the bank returns the principal plus interest (e.g., 5% annually).capital securitysteady returnsno or very low risk of capital losslow return rateno access to capital durin the term
- savings account - deposit a set amount (e.g., 1000 PLN) into a savings account with a specific interest rate (e.g., 2% annually). You can deposit and withdraw at any time, and the bank accrues interest on the balance. safe, profitable, low-risk like a depositquick access to capitallower return rate, often less than deposits
- assets: stocks, gold, real estate, cryptocurrencies, etc. - buy assets that have the potential to grow in value over time. Investing in assets involves risk but can lead to higher returns compared to conservative financial instruments.potentially high returns"exit" to capital availabilityrisks - price fluctuations

## Overpayment vs investment

Which is better – overpaying your loan or investing potential overpayments? The comparison between both strategies comes down to evaluating which one will bring greater long-term benefits. An overpayer repays the loan faster than an investor – if time is the priority, overpayment is the better choice. However, if maximizing profit is the goal, the better strategy is the one that ultimately yields higher returns. The overpayer and investor will face different loan repayment costs. The investor’s capital will work longer, but the overpayer will invest more, as they have more available capital than the investor. The better strategy is the one that results in a larger final amount. The showloan.info calculator allows you to configure loan parameters, presenting the details of both strategies for an accurate comparison.

Same installments, overpayer overpays $1,000, investor invests $1,000

Lower installment for overpayer, overpayer overpays $1,000, investor invests $990

Overpayer starts investing, investor only repays installments

Overpayer has repaid the loan and only invests, investor only repays installments

Investor repays the loan

The comparison of investor and overpayer strategies assumes:

- both the investor and overpayer have the same monthly costs- for loan repayment and/or installment overpayment or/and investment
- the comparison covers the original loan term- the overpayer repays the loan faster than the investor, but the strategy is evaluated over the full loan period (without shortening due to overpayments)
- the overpayer also invests spare capital- as loan payments decrease and the loan term shortens, the overpayer has additional capital to invest (both investor and overpayer invest in the same financial instruments)

Example: $250,000 loan at 8%, $400,000 to repay, 153 installments remaining

The following calculations are approximate

Overpayer

Overpays the loan by $1,000 per month

Investor

Pays the original loan installment and invests in a savings account at 5%

*Month 1*

Same installments, overpayer overpays $1,000, investor invests $1,000

- Loan installment: $2,611
- Overpayment: $1,000
- Total: 2,611 + 1,000 = $3,611

- Loan installment: $2,611
- Investment: $1,000
- Total: 2,611 + 1,000 = $3,611

*Month 2*

Lower installment for overpayer, overpayer overpays $1,000, investor invests $990

- Loan installment: $2,601 - installment reduced after the first overpayment
- Overpayment: $1,000
- Total: 2,601 + 1,000 = $3,001

- Loan installment: $2,611
- Investment: $990 - lower than in Month 1 due to overpayer's reduced costs
- Total: 2,611 + 990 = $3,001

*Month 79*

Overpayer starts investing, investor only repays installments

- Loan installment: $1,600
- Overpayment: $1,000
- Investment: $11 - overpayer's surplus compared to investor's costs
- Total: 1,600 + 1,000 + 11 = $2,611

- Loan installment: $2,611
- Investment: $0 - no more investments, no capital left compared to overpayer's costs
- Total: $2,611

*Month 136-153*

Overpayer has repaid the loan and only invests, investor only repays installments

- Loan installment: $0 - investor has already repaid the loan
- Overpayment: $0
- Investment: $2,611 - full surplus (previous installment) is invested
- Total: $2,611

- Loan installment: $2,611
- Investment: $0
- Total: $2,611

*After 153 months*

Investor repays the loan

- Total spent: $441,000
- Loan cost: $357,000
- Invested: $84,000
- Return on investment: $6,400
- Net earnings: 84,000 + 6,400 = $90,400

- Total spent: $441,000
- Loan cost: $400,000
- Invested: $41,000
- Return on investment: $22,000
- Net earnings: 41,000 + 22,000 = $63,000

showloan.info 2024