Loan Payback Optimizer: Excel Model - How Extra Principal Payments Can Save Money

If you are trying to solve for the savings of paying extra principal on loans over time, this will help. The financial model done here will tell you the effect of adding an extra amount of cash to your regular debt service payments of standard principal and interest loans.



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The end result is you see the timing and amount of debt service in the modified version as it compared to the original version. The original would be where you simply stick to all the debt repayment amortization schedules and don't pay any extra. The modified part will show you if you for example add $1,000 of extra capital to one of your loans each month, how much it will save you across the length of all the loans.

The logic is built in a way where each time the loan that is getting the extra payment is paid off, the fixed extra payment amount will move to the next loan in line. Also, the loans are ranked with two possible styles. You can rank them from most total interest to least or highest interest rate to least. Each will result in a different effect depending on your loan assumptions.

Your scenario will dictate the final results, but the logic here is solid and can handle a lot of situations well. I added charts and totals as well as a monthly debt service schedule that shows the actual payments happening of all the loans side by side over time and that is where you see the accumulated difference accruing month to month.

Just thinking about what is happening in general is you are front loading the loans so you end up with higher total debt service payments at first but then less overall interest to pay.

Also note that this model doesn't currently roll the loans that were paid off into the loans still remaining. That could be a possible feature add in the future, but currently it doesn't exist here. A simpler fix could be that we define a surplus of cash that is used per year. That way you can manually see how much total debt service you have each year based on the loans getting paid down and when it goes down, you can raise the excess principal payment to match what you are no longer having to pay on the other loans. This would further accelerate the time it takes to payoff the loans, but it would also require that your debt service basically never go down until you have paid everything off.

Keep in mind the type of debt this is to be used for is standard principal and interest loans with a set interest rate, term, and payments per each term. It will not work well for credit card debt or interest only loans, but may be able to be modified to do so. The main idea here is just to see what happens if you start putting a little extra principal into each of your payments. It is surprising how much time you can save from being in debt and how much actual money can be saved.

You may also be interested in this lending as a service financial model.