Loan payoff calculator

How loan payoff math works

Most personal loans and credit cards amortise: each month, interest is calculated on the remaining balance, and your payment is split into interest and principal. The principal portion shrinks the balance; the interest portion is the lender\u2019s cut.

Early in the loan, the balance is high, so most of each payment is interest. As the balance shrinks, the interest component falls and the principal component grows. This is why the first 5 years of a personal loan feel like you are barely making progress — and why paying even a small amount extra in the early years can shave years off the loan.

Avalanche vs snowball: which debt strategy?

The avalanche method is mathematically optimal: pay the minimum on every debt, and put every spare dollar into the debt with the highest interest rate. Once that is paid off, roll the payment into the next-highest-rate debt. This minimises total interest paid.

The snowball method is psychologically easier: pay the minimum on every debt, and put spare dollars into the smallest balance first. The quick win of clearing a small debt gives you momentum. The total interest is slightly higher, but if it is the difference between staying the course and giving up, it is the better strategy.

For most people, the avalanche method is the right default — but the calculator works either way. Pick the one you will actually stick to.

Using a redundancy payout or other lump sum

A one-off payment — a redundancy payout, an inheritance, a tax refund, a bonus, an inheritance — goes directly against the principal. The next month\u2019s interest is calculated on the smaller balance, and the loan is paid off faster. If you have just received a redundancy payout and want to know what it does to your loan balance, the calculator doubles as a redundancy calculator — enter the payout in the lump sum field, and the schedule re-runs from month zero with the smaller starting balance.

In Australia, "genuine redundancy" payments up to a limit (the ATO\u2019s ETP cap, currently around $11,500 for people under preservation age, more for older workers) are tax-free. The rest is taxed at a concessional rate. So the full payout is usually available to apply to debt, even though you might pay some tax on the larger amount.

The general rule: if the loan interest rate is higher than the after-tax return you would get from investing the lump sum, pay off the loan. For most personal loans and credit cards (12-22% interest), the answer is almost always pay off the loan.

When refinancing beats extra payments

If your loan is at 18% and you can refinance to 9%, you have effectively given yourself a 9% guaranteed return on whatever balance you refinance. That is almost always better than any extra repayment you could make.

For credit cards, a balance transfer to a 0% introductory card can buy you 6-18 months of interest-free repayment. The savings depend on the balance transfer fee (typically 1-3%) and how aggressively you pay it down during the intro period. If you can pay off the full balance before the intro ends, the effective interest rate is just the transfer fee.

Common mistakes

• Only paying the minimum on a credit card. The balance will take 10+ years to clear and cost more in interest than the original purchases.
• Paying off the smallest balance first when you should be paying off the highest-rate one. The quick win of a small balance can cost thousands in extra interest over the life of the loan.
• Keeping the loan because the rate is "low". If the rate is 5% and you have cash earning 4% in a savings account, the loan is still costing you 1% per year. Pay it off.
• Forgetting about monthly interest on credit cards. A $5,000 balance at 20% costs $83 a month just in interest. If your minimum is $100, you are barely paying off any principal.
• Not setting a payoff date. Loans without a target end date tend to last forever. Pick a date, model the payment needed to hit it, and set up an automatic direct debit.

Frequently asked questions