Pay Off Debt Faster Using Compounding Extra Payments

I'm Jason with The Honest Finance Channel, and today I want to talk about how you can pay off debt faster using compound interest. So let's say that you finance a house for $200,000 at 30 years at 5% interest. Over the life of that loan, you're going to pay $186,000 in interest just from making your normal payments. Now let's pretend that you had an extra $5,000 laying around and you put that towards the loan on your very first month. Well now at the end of that loan, you're going to pay $170,000 in interest. And that's a savings of over $16,000 just because you had that extra $5,000 at the beginning of the loan. Now I know that coming up with five grand is a lot of money to go towards one payment. I'm just trying to make a point here that the more money you can put down on your loan at the beginning of the loan, the more it's going to help save you money in the long run. The reason that extra payment saves you so much money over time is because of what I like to call reverse compound interest. I'm sure there's a fancy bank term for it, but that's what I call it. Reverse compound interest is happening in this example because when you put that $5,000 towards that mortgage, you're going to save 5% interest on that amount year after year. And it's also going to be on top of 5% and on top of 5%. And that's because that's how compound interest works. It's interest on top of interest. And don't forget the extra payments also help your equity grow as well. So what I'm trying to say here is pay extra as early as you can in your loans so that you can save as much on interest as possible. You want to get the compound interest rolling as soon as you can because that's the fastest way to pay off your loan with extra cash. And keep in mind that these numbers will totally fluctuate depending on your loan, how long it is and your interest rate, and obviously how much extra you're paying on the loan. Just find a loan calculator online and find out for yourself how much you'll save depending on how much extra you pay towards the loan. You don't need to do a bunch of fancy math. Just find a loan calculator and plug in the numbers. I really just want to get the point across that an extra payment is like a snowball. The snowball is going to start out small, but it's going to grow a lot bigger over time because of the compound interest. And in this case, you'll be saving money in interest because of your extra payments because of what I call reverse compound interest. Paying extra on your loans really does pay off the loans faster. Once again, I'm Jason with The Honest Finance Channel. If you did find this information helpful, feel free to subscribe or at least give the video a like. That's all.