What’s More Profitable: Reducing the Loan Term or the Monthly Payment?

If you have extra funds and want to repay part of your debt early, you can cut the total cost of your loan. Most banks allow you to choose — either reduce your monthly payment or shorten the repayment term. Which is better depends on your goals and the amount of money available. Let’s look at the advantages of each approach.

When your main goal is to minimize total interest payments, it’s more profitable to shorten the loan term rather than reduce the monthly payment. However, in some cases, it makes more sense to lower your regular payments. Below, we’ll explain how each option affects your interest costs and what borrowers should consider before making a decision.

What Are the Benefits of Reducing the Loan Term?

Banks charge interest on the remaining loan balance daily. The shorter the term, the less interest you’ll pay overall.

By repaying the loan early, you may also be able to cancel certain additional services tied to your credit agreement. For example, if you buy annual life insurance to keep your mortgage rate low, and you repay the loan six months earlier, you can claim back half of the cost of the last policy.

What Are the Benefits of Reducing the Monthly Payment?

After making an extra payment, your outstanding balance decreases — but since your new monthly payment will be smaller, the loan will be paid off more slowly. Interest will continue to accrue over a longer period. Therefore, your total savings will be smaller than if you had shortened the term. Still, you’ll benefit from lower financial pressure.

Reducing monthly payments is useful when you need to ease your credit load — for example, to free up money for living expenses, if your income has dropped, or if you expect temporary financial instability and want to avoid missing payments.

Even if you’re managing your loans comfortably now, it’s wise to follow the rule: total loan payments should not exceed 30% of your monthly budget. If a large portion of your income goes toward loan and microloan payments, it’s better to reduce them. This helps you avoid defaults in case of unexpected financial setbacks.

When Is the Best Time to Make Partial Early Repayments?

The earlier you make an extra payment, the more you’ll save. The bank will immediately recalculate your debt, and less interest will accrue.

Near the end of your loan term, most of the interest has already been paid, so the savings will be less noticeable.

When choosing the payment date, remember that an early repayment doesn’t replace your regular payment. For example, if your payment is due on the 5th of each month and you make an extra payment on the 3rd, you still need to make your regular payment on the 5th. Otherwise, you’ll face a delay and possible penalties.

The most efficient approach is to make early repayments on your scheduled payment date. That way, the full extra amount will go toward reducing your debt, not paying accumulated interest. If your extra payment is small, it might go entirely toward interest instead of principal, resulting in little to no debt reduction.

How Often Can You Make Early Payments?

You’re allowed to make additional payments as often as you like — even every month. If your loan agreement has no restrictions, you can decide each time whether to reduce the term or the payment amount.

For example, at first, you might choose to reduce your monthly payments to make them more manageable during uncertain times. Later, when your financial situation improves, you can switch to shortening the term to minimize total interest costs.

However, keep in mind that you must notify the bank in advance before making an additional payment. Otherwise, the bank will process only your regular scheduled payment and won’t recalculate your remaining balance.