Why You Should Consider Making Extra Repayments On Your Loan

Borrowing money with a loan for life’s essential expenses can leave you with an ongoing obligation to pay that money back with interest. Depending on the details of your loan, this can go on for several years, which is never fun.

In this article, Jacaranda Finance explains how making extra repayments on your loan works, the pros and cons and why you should consider it.

On this page:

• An introduction to loan repayments
• How much will your repayments be?
• Can you make extra repayments on a loan?
• Are there fees for making extra loan repayments?
• Can you pay off your entire loan early?
• What are the benefits of making extra loan repayments?
• Pros and cons of extra repayments
• An example of how extra loan repayments work
• Tips to save on your loan repayments

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An introduction to loan repayments

When you borrow money for a loan, the money is then repaid in regular instalments with interest. These instalments - known as repayments - are usually structured at the start of the loan and are laid out in your contract. Your minimum repayment is the default amount you must pay to pay off what you borrowed within your loan term.

Depending on the lender, you can make these minimum repayments manually, but nowadays, most people have them automatically debited from a nominated bank account on specific dates. You could be charged a late payment fee if you miss a repayment deadline or pay below the minimum required amount.

How much will your repayments be?

When taking out a loan, your repayments will be influenced by several factors:

• The principal (how much you borrow)
• The loan term (how long your loan is)
• The interest rate on your loan
• Any associated fees and charges

Your repayments can also change if you have a variable interest rate: these rates can change at the lender’s discretion, meaning your repayments can go up or down. With a fixed interest rate, however, your minimum repayments cannot change for the duration of the fixed period.

Can you make extra repayments on a loan?

The repayment amount a lender charges you each time isn’t set in stone. The amount set out in your loan contract is simply the minimum amount you have to pay. You can make extra payments into your loan as a regular payment or a one-off lump sum.

Some of the ways lenders let you do it these days are:

• Filling out a form in a branch
• Emailing a customer support team
• Requesting in an app/online portal
• Selecting a payment amount and hitting a button online/in-app

Different lenders make it easier than others, so try to bear this in mind when comparing your options.

Are there fees for making extra loan repayments?

There can be. Some lenders will charge a fee for making additional repayments beyond your minimum: these might apply for all extra repayments or only extra repayments beyond a certain number or dollar amount.

These fees are designed to compensate the lender for potential loss of interest income. However, many lenders don't charge this fee. For those that do, these fees can be anywhere from a few dollars to around $25 - $30 at their highest.

Ultimately it will depend on the lender and your loan, so check their product disclosure statement (PDS) and fee schedule for more information.

How to make extra repayments with Jacaranda Finance

Jacaranda Finance does not charge any fees for making extra repayments to your loan. If you want to pay a little more into what you owe and get ahead of your loan balance, it’s free to do so with us!

To make fee-free extra loan repayments with Jacaranda, simply log into your account via our FastMoney app or online portal. There, you can make extra repayments either as a one-off or regularly. It’s easy and fast!

Can you pay off your entire loan early?

You can also pay off your loan in its entirety ahead of schedule if you can. Your loan contract will have a fixed loan term (usually a couple of years or more), which is what your minimum repayments are based on. But you can choose to pay off your full loan balance well ahead of this schedule.

Are there fees for early loan payouts?

If you pay off your loan earlier than the agreed term, you might also be charged an early repayment fee. Like the extra repayment fee, it's intended to compensate the lender for potential loss of interest income.

The fees charged for this (if any) will again vary from lender to lender. While some lenders won’t charge anything for early repayments, those that do typically charge between $100 - $300, possibly more. 

How to pay off your loan with Jacaranda Finance

Just like with extra repayments, Jacaranda does not charge a fee for paying out your loan early. All fees will be clearly set out in your loan contract; to pay out your loan balance, just log in to the app or online portal to manage your repayments.

Once your loan is fully paid off and the balance is $0, we will contact you to confirm this.

What are the benefits of making extra loan repayments?

You might be wondering why you’d want to make extra loan repayments beyond your minimum amount. After all, wouldn’t it be better not to pay more than you need to and save that money instead?

While that can be a better option for some, the simple answer to why you’d want to make additional loan repayments is the more you pay, the less you owe. And the less you owe, the less interest you’ll pay.

Interest is charged on the principal amount borrowed at the start of the loan and at each subsequent repayment. If you borrowed $10,000, you’ll be charged a per-annum interest rate on that $10,000. But if you borrowed $9,000 instead, you’d be charged interest on $9,000, resulting in a smaller repayment.

Since your initial loan term is based on your original principal borrowed and the subsequent repayments, you can also pay off your loan faster if you pay more than you need to.

If your loan comes with a redraw facility, you can also access these extra funds you’ve paid if you need them, although doing so will cancel out the savings made on your loan.

An example of how extra loan repayments work

Let's use an example to help visualise how making extra repayments can be beneficial.

Let’s say you took out a $10,000 personal loan with an interest rate of 20% p.a. and a loan term of two years (24 months). Here’s what your minimum monthly repayments would be with: no extra payments, $50 extra per month, and $100 extra per month.

	Monthly repayments	Total interest charged	Total cost of loan	Time saved
No extra repayments	$509	$2,215	$12,215	N/A
Extra repayment of $50 a month	$559	$1,975	$11,975	Two months
Extra repayment of $100 a month	$609	$1,783	$11,783	Four months

Note: calculations do not factor in any fees or interest rate changes, and assumes extra repayments are made from the first month of the loan.

As you can see, paying just $50 more than your minimum required monthly repayments means saving nearly $240 off your total loan amount. If you found an extra $100 to pay monthly, you’d save $432 and four months off your two-year loan!

What are the downsides of extra loan repayments?

Making additional loan repayments might sound like a pretty sweet deal, but it isn’t a one-size-fits-all solution. There are some potential downsides to doing so.

First, not every lender allows extra repayments, as what you pay in interest is how they make money, after all. Even if they allow extra repayments (which most do now), many still charge fees or place caps on making extra repayments. 

Read the PDS and other relevant product info to check that a lender allows extra repayments and, if they do, what fees they might charge. If your current lender doesn’t have this feature, you should consider refinancing to one that does!

Extra repayments are a feature more common to variable-rate loans. Lenders are less likely to offer this to fixed-rate loan customers.

Another potential downside to making extra repayments is what happens when your loan is fully paid off. As we discussed earlier, lenders can also charge an early loan payout fee to compensate for the lost income from interest.  

Finally, making extra loan repayments can come with an opportunity cost in terms of your income and savings. Are you financially secure enough to direct extra funds towards your loan repayments instead of your savings account, investments or other loans and bills? 

Increasing your repayments isn’t a decision you should make on a whim, so weigh up the pros and cons before deciding.

Making extra loan repayments: pros and cons

Here’s a quick summary of the pros and cons of extra loan repayments to help you decide what’s right for you.

Pros	Cons
You can pay off your loan faster You can save money overall on your loan It can establish good credit patterns, improve your creditworthiness and look favourable to other lenders It can lead to enhanced financial freedom and reduce stress It can be easy to do depending on the lender	Not every lender lets you do this Some lenders only allow it if you have a variable-rate loan Some lenders charge fees or impose caps on your extra repayments Some lenders may charge an early payout fee if you fully pay off your loan ahead of schedule It leaves less money to spend, save or invest Accessing these funds if you need them can be tricky without a redraw facility

Other tips to save on your loan repayments

If paying extra into your loan regularly doesn’t sound like it’s for you, there are some other strategies you can employ to get the most out of your loan instead.

Compare interest rates and fees

If you haven’t yet taken out a loan, it’s crucial to compare a number of different options based on their rates, fees, features, speed and customer service. Doing this can help you avoid applying for a loan that’s too expensive or doesn’t meet your needs, and you could save money right away by securing more competitive rates and fees.

Refinance or consolidate your debts

You might not be happy with your current loan for many reasons. It might be too expensive, charge too many fees, be too inflexible or take too long to get in touch with an actual human being.

If you already have a loan but aren’t happy with it, consider refinancing (switching) to one that better suits your needs and take advantage of lower interest rates or more favourable terms. And if you have other debts, such as credit cards and other personal or car loans, you can also utilise a debt consolidation loan to merge them into one easier-to-manage payment.

See our article on the pros and cons of debt consolidation loans for more information.

Make a lump sum payment

Rather than continuously paying extra into your loan, you can instead make one bigger lump sum payment. This can be a handy strategy if you come into some extra money, like a tax refund or a bonus from work. 

Making one or two bigger payments instead of several dozen smaller ones can make managing your day-to-day finances a bit easier.

Pay more frequently

It’s common for lenders to offer several different repayment frequencies: weekly, fortnightly and monthly. Monthly tends to be the default option, but you can change how often you make your repayments by either contacting your lender or doing it yourself online.

This can get a bit tricky to explain, but weekly and fortnightly repayments can essentially mean you’re making an extra month’s worth of payments during a year, as there are 12 months in a year but 26 fortnights and 52 weeks.

Let’s use our loan repayment calculator to see the difference between each repayment frequency, based on a $10,000 loan over 24 months:

Repayment schedule	Estimated total repaid	Savings vs monthly
Monthly	$15,459	N/A
Fortnightly	$15,370	$89
Weekly	$15,342	$117

Please consider: The example repayment is a guide based on the highest rate available for a product. Fees, credit criteria and terms and conditions apply.

As you can see, the savings are minor but could still be worthwhile. 

Change your payment date

You can get in touch with your lender or manage your loan online to change the date your repayments are debited from your account and even change the bank account you pay from.

Although this might not directly save you money, it can make budgeting easier to set your repayments out of your bank account on a certain date. You might prefer to pay your loan on payday or the same day you make other repayments like rent, credit cards etc.

Budget and build an emergency savings buffer

Not keeping track of money closely is one of the biggest reasons people struggle with loan repayments. Before taking out any kind of loan, make sure you’ve drawn up a budget that contains the following:

• Money in and the dates you receive it
• Money out: how much and by category
• Important expenses you can’t live without (rent, mortgages, electricity etc.)
• Reminders for key payments
• What you can cut out, and how much you have leftover

If times are a bit tough, creating an emergency savings buffer in a separate account with a few months’ worth of living expenses might be a safer tactic than paying extra off your loan.

Is making extra loan repayments right for me?

If you can comfortably afford to do so and your lender gives you the option (and you’re ok with any fees you might be charged), then making extra repayments on your loan can be an excellent strategy to pursue. You can save both money and time, and who doesn’t want more of those things?

Of course, this strategy isn’t right for everyone. If you’re already struggling to meet your loan repayments on time, you might be better off directing your money elsewhere.

At Jacaranda Finance, we offer a combination of fixed interest rates and fee-free additional repayments, done easily online. This means you can get the best of both worlds with Jacaranda: our fixed repayments can make it easier to budget while also giving you the flexibility to make extra repayments if you want to.

We also make it easy to:

• Make a lump sum payment
• Change your payment dates and set up direct debits in line with your schedule
• Change the frequency of your repayments (weekly, fortnightly or monthly

To help work out if making additional repayments on your loan is worthwhile for you, try out our loan repayment calculator to get an estimate of what the difference could be.

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The information on this website is for general information only. It should not be taken as constituting professional advice from the website owner - Jacaranda Finance. Jacaranda Finance is not a financial adviser, and the content on this page does not take into account your objectives, financial situation or needs. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances.

Jacaranda Finance is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly by use of this website.

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