How it is calculated
The loan is re-run month by month: interest is charged on the balance, then the regular payment plus the extra comes off the principal. A faster-falling balance cuts interest in every later month.
Extra payments early in a loan save far more than the same amount near the end.
Worked example
A 500,000 balance at 5% over 20 years (payment about 3,300): paying 500 extra a month clears it about 4 years early and saves about 66,000 in interest.
Frequently asked questions
Are there early repayment fees?
Some banks charge a fee, capped by law in some countries. Ask your bank first.
Lower the payment or the term?
Shortening the term (same payment) saves more interest; lowering the payment gives monthly flexibility.
Repay early or invest?
If your loan rate is higher than the guaranteed return you can earn, repaying usually wins.