Paying off loans early, or is there some way to reduce extortionate interest charges?
It really depends on the terms of your loan. For example, some loans have a pre-payment penalty. You will just have to ask your lender to know for sure. That said. In almost all cases, you can save considerable interest by making extra payments towards the principal. Be careful though, some lenders require you to specifically mark the payment to be applied to the loan principal and if you don't designate it as such, they will just apply it as an early payment for future months and not reduce your balance until that future payment is due, which doesn't help at all. Another option to reduce your total interest costs, though more common for larger loans like mortgages, is to split the payment into multiple parts and pay more than once a month instead of a single payment each month. This only works if they calculate interest daily and would be useless if they do it monthly. They key is knowing the terms of your loan. Despite it not being in their best interest (pun intended), most lenders will work with you on a strategy to help you minimize the interest cost in the name of customer service. "My husband made a similar car loan decision when he was younger and didn't have an established credit history / favourable credit rating.  As a result, he ended up paying triple what the car was worth, because of the interest. When we consolidated our finances, this ugly loan was first on our list of priorities to change, convert, eliminate, but unfortunately, in our case, the terms of the loan were such that only the lender benefited.  There was no incentive to pay off the loan early, in fact, we would have to have paid all the future interest at once, without saving a penny. So check the terms of your loan - hopefully you're better off than we were.  In our case, the only upside we could figure was the lesson of ""live and learn""!"
Congratulations for achieving an important step in the road to financial freedom. Some view extending loan payment of loans that allow the deduction of interest as a good thing. Some view the hit on the credit score by prematurely paying off an installment loan as a bad thing.  Determining the order of paying off multiple loans in conjunction with the reality of income, required monthly living expense, and the need to save for emergencies is highly individualized.  Keeping an artificial debt seems to make little sense, it is an expensive insurance policy to chase a diminishing tax benefit and boost to a credit score. Keep in mind it is a deduction, not a credit, so how much you save depends on your tax bracket.  It might make sense for somebody to extend the loan out for an extra year or two, but you can't just assume that that advice applies in your situation. Personally I paid off my student loan early, as soon as it made sense based on my income, and my situation. I am glad I did, but for others the opposite made more sense. "Basically, your CC is (if normal) compounded monthly, based on a yearly APR. To calculate the amount of interest you'd pay on each of these accounts in a year, pull up a spreadsheet like Office Excel. Put in your current balance, then multiply it by the annual interest rate divided by 12, and add that quantity to the balance. Subtract any payment you make, and the result is your new balance. You can project this out for several months to get a good estimate of what you'll pay; in accounting or finance terms, what you're creating is an ""amortization table"". So, with a $10,000 balance, at 13.99% interest and making payments of $200/mo, the amortization table for one year's payments might look like: As you can see, $200 isn't paying down this card very quickly. In one year, you will have paid $2,400, of which $1,332.25 went straight into the bank's pockets in interest charges, reducing your balance by only $1,067.75. Up the payments to $300/mo, and in 1 year you will have paid $3,600, and only been charged $1,252.24 in interest, so you'll have reduced your balance by $2,347.76 to only $7,652.24, which further reduces interest charges down the line. You can track the differences in the Excel sheet and play ""what-ifs"" very easily to see the ramifications of spending your $5,000 in various ways. Understand that although, for instance, 13.99% may be your base interest rate, if the account has become delinquent, or you made any cash advances or balance transfers, higher or lower interest rates may be charged on a portion of the balance or the entire balance, depending on what's going on with your account; a balance transfer may get 0% interest for a year, then 19.99% interest after that if not paid off. Cash advances are ALWAYS charged at exorbitantly high rates, up to 40% APR.  Most credit card bills will include what may be called an ""effective APR"", which is a weighted average APR of all the various sub-balances of your account and the interest rates they currently have. Understand that your payment first pays off interest accrued during the past cycle, then pays down the principal on the highest-interest portion of the balance first, so if you have made a balance transfer to another card and are using that card for purchases, the only way to avoid interest on the transfer at the post-incentive rates is to pay off the ENTIRE balance in a year. The minimum payment on a credit card USED to be just the amount of accrued interest or sometimes even less; if you paid only the minimum payment, the balance would never decrease (and may increase). In the wake of the 2008 credit crisis, most banks now enforce a higher minimum payment such that you would pay off the balance in between 3 and 5 years by making only minimum payments. This isn't strictly required AFAIK, but because banks ARE required by the CARD Act to disclose the payoff period at the minimum payment (which would be ""never"" under most previous policies), the higher minimum payments give cardholders hope that as long as they make the minimum payments and don't charge any more to the card, they will get back to zero." "Check the terms of your mortgage. If you are in a fixed-term mortgage, you can likely ""over-pay"" a fixed amount of the capital each year: typically 10%. Eg if you owe £300,000 on the mortgage, you can pay off an additional £30,000 this year. Next year you'd owe something like £260,000 so could pay off £26,000. You'd need to check the terms of your mortgage to see what this limit is. You can actually pay off more than this, but would become liable to pay an ""early repayment fee"" or similar, which is usually something like 3-5% of the mortgage amount. Note that this usually means you would need to re-finance the mortgage anyway If you are not on a fixed-term mortgage than, in the UK at least, you are pretty much free to over-pay as much as you would like or refinance the mortgage. If you are in a fixed-term mortgage, it is usually better to simply over-pay by that maximum allowed amount until the fixed period ends, at which point you can re-finance onto a mortgage that allows higher overpayments. This isn't always the case, though, depending on your interest rate, how high the early repayment charge is, and how much you are able to over-pay. At the very least, you're going to need to do some sums! If you do choose to over-pay up to the limit, then you'd want to over-pay as much as you can at the start of the year (ie don't divide the over-payment by 12, pay it all as early as you can) to reduce interest payments. Then once you hit the limit, put the rest into a savings account: once you are out of the fixed term you can then pay the rest as a lump sum when refinancing." "This will happen automatically when you open an interest-bearing account with a bank.   You didn't think that banks just kept all that cash in a vault somewhere, did you?  That's not the way modern banking works.   Today (and for a long, long time) banks will keep only a small fraction of their deposits on hand (called the ""reserve"") to fund daily withdrawals and other operations.  The rest they routinely lend out to other customers, which is how they pay for their operations (someone has to pay all those tellers, branch managers, loan officers) and pay interest on your deposits, as well as a profit for their owners (it's not a charity service).  The fees charged for loan origination, as well as the difference between the loan interest rate and the deposit rate, make up the profit.   Banks rarely hold their own loans.  Instead, they will sell the loans in portfolios to investors, sometimes retaining servicing rights (they continue to collect the payments and pass them on) and sometimes not (the payments are now due to someone else).  This allows them to make more loans.   Banks may sometimes not have enough capital on hand.  In this case, they can make inter-bank loans to meet their short-term needs.  In some cases, they'll take those loans from a government central bank.  In the US, this is ""The Fed"", or the Federal Reserve Bank.   In the US, back around the late 1920's, and again in the 1980's some banks experienced a ""run"", or a situation where people lost confidence in the bank and wanted to withdraw their money.  This caused the bank to have insufficient funds to support the withdrawals, so not everyone got their money.  People panicked, and others wanted to take their money out, which caused the situation to snowball.  This is how many banks failed.  (In the '80s, it was savings-and-loans that failed - still a kind of ""bank"".)  Today, we have the FDIC (Federal Deposit Insurance Corporation) to protect depositors.  In the crashes in the early 2000's, many banks closed up one night and opened the next in a conservatorship, and then were literally doing business as a new bank without depositors (necessarily) even knowing.  This protected the consumers.  The bank (as a company) and its owners were not protected." "There are some loan types where your minimum payment may be less than the interest due in the current period; this is not true of credit cards in the US.  Separately, if you have a minimum payment amount due of less than the interest due in the period, the net interest amount would just become principal anyway so differentiating it isn't meaningful. With credit cards in the US, the general minimum calculation is 1% of the principal outstanding plus all interest accrued in the period plus any fees.  Any overpayment is applied to the principal outstanding, because this is a revolving line of credit and unpaid interest or fees appear as a charge just like your coffee and also begin to accrue interest.  The issue arises if you have multiple interest rates.  Maybe you did a balance transfer at a discounted interest rate; does that balance get credited before the balance carried at the standard rate?  You'll have to call your lender.  While there is a regulation in place requiring payment to credit the highest rate balance first the banks still have latitude on how the payment is literally applied; explained below.   When there IS an amortization schedule, the issue is not ""principal or interest"" the issue is principle, or the next payment on the amortization schedule.  If the monthly payment on your car loan is $200, but you send $250, the bank will use the additional $50 to credit the next payment due.  When you get your statement next month (it's usually monthly) it will indicate an amount due of $150.  When you've prepaid more than an entire payment, the next payment is just farther in to the future.  You need to talk to your lender about ""unscheduled"" principal payments because the process will vary by lender and by specific loan. Call your lender.  You are a customer, you have a contract, they will explain this stuff to you.  There is no harm that can possibly come from learning the nuances of your agreement with them. Regarding the nuance to the payment regulation: A federal credit card reform law enacted in May 2009 requires that credit card companies must apply your entire payment, minus the required minimum payment amount, to the highest interest rate balance on your card.  Some credit card issuers are aggressive here and apply the non-interest portion of the minimum payment to the lowest interest rate first.  You'll need to call your bank and ask them." If I recall correctly, the pay schedule is such that you initially pay mostly interest.  As James Roth suggests, look at the terms of the loan, specifically the payment schedule.  It should detail how much is being applied to interest and how much to the actual balance. Unless you are getting the loan from a loan shark, it is the most common case that each payment is applied to the interest accrued to date and the rest is applied towards reducing the principal.  So, assuming that fortnightly means 26 equally-spaced payments during the year, the interest accrued at the end of the first fortnight is $660,000 x (0.0575/26) = $1459.62 and so the principal is reduced by $2299.61 - $1459.62 = $839.99 For the next payment, the principal still owing at the beginning of that fortnight will be $660,000-$839.99 = $659,160.01 and the interest accrued will be $659,160.01 x (0.0575/26) = $1457.76 and so slightly more of the principal will be reduced than the $839.99 of the previous payment.  Lather, rinse, repeat until the loan is paid off which should occur at the end of 17.5 years (or after 455 biweekly payments). If the loan rate changes during this time (since you say that this is a variable-rate loan), the numbers quoted above will change too. And no, it is not the case that just %5.75 of the $2300 is interest, and the rest comes off the principle (sic)? Interest is computed on the principal amount still owed ($660,000 for starters and then decreasing fortnightly). not the loan payment amount. Edit  After playing around with a spreadsheet a bit, I found that if  payments are made every two weeks (14 days apart) rather than 26 equally spaced payments in one year as I used above, interest accrues at the rate of 5.75 x (14/365)% for the 14 days rather than at the rate of (5.75/26)% for the time between payments as I used above each 14 days, $2299.56 is paid as the biweekly mortgage payment instead of the $2299.61 stated by the OP, then 455 payments (slightly less than 17.5 calendar years when leap years are taken into account) will pay off the loan.  In fact, that 455-th payment should be reduced by 65 cents.  In view of rounding of fractional cents and the like, I doubt that it would be possible to have the last equal payment reduce the balance to exactly 0. "Pay off the highest rate debt. Interest on both are charged on the balance owed, nothing more complicated than that. There are those who would call a mortgage ""front loaded"" but that's nonsense. Of course most of the payment is interest at the beginning because the debt is higher and you start with a 30 year term. The fastest way to pay off multiple debts is always from highest rate first and then the next and so on."