Loan Prepayment: Reduce Payment or Term Calculator
Making a lump-sum prepayment on a loan or mortgage? Compare lowering the monthly payment with shortening the term — interest saved, new payment, months saved and any prepayment fee.
How it works
Current payment A₀ = B × i ÷ (1 − (1 + i)⁻ⁿ) · new balance B′ = B − prepayment · reduce payment: A₁ = B′ × i ÷ (1 − (1 + i)⁻ⁿ) · reduce term: keep A₀, months m = −ln(1 − i × B′ ÷ A₀) ÷ ln(1 + i) · interest = payments − principal
After a partial prepayment (an extra lump sum against principal) most lenders let you choose: keep the same end date and lower the monthly payment, or keep the payment and finish sooner. Shortening the term always saves more interest because the higher payment keeps paying down principal faster; lowering the payment frees up monthly cash flow and is the safer choice if your budget is tight or your rate is low compared with what your money could earn elsewhere. This is the classic “amortizar cuota o plazo” decision for Spanish and Latin American mortgages.
Worked example
A 150,000 balance at 4% with 240 months left costs 908.97 a month and 68,152.92 of future interest. After a 20,000 prepayment, reducing the payment drops it to 787.77 for the same 240 months (interest 59,065.86, a saving of 9,087.06). Keeping the 908.97 payment instead pays the loan off in 195 months — 16 years 3 months, 3 years 9 months sooner — with 46,904.97 of interest, saving 21,247.95: 12,160.90 more than lowering the payment.
Sources: Wikipedia — Amortization calculator · Wikipedia — Prepayment of loan
Frequently asked questions
Is it better to reduce the payment or the term?
Reducing the term saves the most interest. Reducing the payment saves less but improves monthly cash flow and flexibility; choose it if you need breathing room, have higher-rate debts, or want to keep an emergency fund.
Why does shortening the term save more?
You keep paying the same higher payment, so every month more goes to principal and the balance falls faster — interest is charged on a smaller balance for fewer months.
Does a prepayment fee change the answer?
It reduces both savings by the same amount, so it does not change which option saves more, but it can make a small prepayment not worth it.
Can I reduce the payment and still pay it off early?
Yes — take the lower payment and voluntarily keep paying the old amount. You get the term savings while keeping the option to fall back to the lower payment.
Related calculators
Estimates for education and planning, not financial advice. Lenders’ contracts, fees, day-count and rounding rules differ — check the official cost disclosure (APR / TAE / CAT) and your loan agreement before deciding.