There is a saying “practice what you preach.” Well I don’t preach, I just suggest, and when the situation allows, for your confidence, I do follow my own suggestions. Case in point.
I partially prepaid my loan using my Christmas bonus (plus much of my savings). I saved interest and time because of the partial prepayment. Interested? See how it works.
Consider the following illustration (note that these are not actual figures but scaled figures).
Given a PHP900K loan and monthly amortization of PHP19K, in the normal course of monthly repayments, O/B will be down to PHP800K after 8 months. In those 8 months, total repayment made was PHP152K, of which PHP100K went to Principal while PHP52K went to Interests. This payment allocation varies per month and depends on how long the loan has been outstanding (or which Nth amortization you are paying).
Contacted my bank and inquired for the fees if I were to partially prepay my loan, with say PHP100K (to bring down my O/B to PHP800k). They got back to me and said that fees will cost PHP7.5K, inclusive of service fee and break funding cost (banks charge this as sort of penalty for disrupting their expected cash flows, because banks do not like too much unexpected money coming in without investment plans for these money). So you thought banks always like to be repaid, and they like early birds. Well not always. Anyway, the fee will depend on your bank of course, plus the rate, the balance, tenor etc. So let’s peg it at PHP7.5k for this example.
Effectively, I spent PHP107.5K, split as PHP100K which went to Principal, while PHP7.5K goes to fees, and my O/B goes down to PHP800K.
Effectively, I saved PHP44.5K of interests (PHP52K less PHP7.5K) and shortened my effective paying period by 8 months due to the “accelerated O/B”.
Note that in the prepayment, no amount went to Interest since this is outside the normal course of my amortizations.
Further, note that my loan tenor stays the same (to mature by 2019), and I did not ask for restructuring or shortening of my tenor because I don’t want to increase my monthly amortization. Instead, what I did, and will do, is that from time to time, when cash flows allow, I will partially prepay and accelerate my balance. Pay more than the usual. If I keep doing this every Christmas bonus, I will completely payoff the loan by mid-2016, way ahead of 2019 maturity date.
That’s two and a half years saved. And thousands of Interest payments avoided. Inquire with your bank now, and set the prepay amount which gives you savings (in interest and time) that offsets the costs (fees).