Prepayment

Prepayment means repaying a loan before its agreed maturity. It is what you do with spare cash to reduce debt, and it saves all the interest that would have accrued over the remaining term.

Many loans carry a prepayment penalty, though. The lender loses interest it had counted on, and the fee recovers part of that. It typically runs 0.5 to 1.5% of the outstanding balance and often disappears after about three years.

So it needs working out. If the interest saved exceeds the fee, repaying wins; if not, waiting does. The higher the rate and the longer the remaining term, the more prepayment is worth.

With several loans, paying the highest-rate one first is mathematically optimal. Clearing a small balance first to lighten the psychological load also works in practice, though — whichever approach you actually finish is the one that wins. You can also choose how it applies. Shortening the term cuts total interest sharply; lowering the monthly payment eases cash flow instead. The right choice depends on what you need.