Shorten the term or lower the payment?
When you pay extra into a loan, the lender asks what you want done with it, and the two options are not equivalent. One of them saves several times more money than the other. Banks rarely spell out which, so here is the arithmetic and the reasoning.
Reviewed 2026-07-30How we calculate
Open this scenario in the calculatorWhat each option actually does
Shortening the term keeps your monthly instalment exactly where it is and applies the whole extra payment to the outstanding balance. The loan simply ends sooner. Lowering the instalment keeps the end date and recalculates a smaller monthly payment across the periods that remain. In both cases the same money goes in; what differs is what the lender does with the space it creates.
Loan amount €250,000 · Term 25 years · Interest rate 4.50% · Extra every month €300
- Monthly instalment
- €1,389.58
- Interest saved
- €51,515
- Time saved
- 6 years 11 months
Computed by the same engine as the calculator, so these figures match what you see if you open the scenario.
Why shortening the term saves more
Interest is charged on the balance you still owe, every single month. Money that goes into the principal early stops accruing interest for the entire remaining life of the loan, so the saving compounds across every month you have left. Lowering the instalment gives most of that compounding back: the balance falls once, then the smaller payment means it falls more slowly from then on. On a typical mortgage, shortening the term saves roughly two to three times the interest that lowering the instalment does, from the identical amount of money.
When lowering the instalment is still the right choice
Total interest is not the only thing that matters. If your monthly budget is tight, or your income is uncertain, a permanently smaller instalment buys breathing room that a shorter term does not. That flexibility has real value, and it is not irrational to pay for it. The mistake is not choosing the lower instalment; the mistake is choosing it without knowing what it cost, which is precisely what the bank leaves unsaid.
Timing matters more than the amount
An extra payment made in year two of a thirty-year loan works for twenty-eight more years. The same payment made in year twenty-five works for five. This is why a modest amount paid early often beats a large amount paid late, and why the single most valuable thing you can do is start rather than wait until you have a round number saved up.
How to check this on your own loan
Enter your balance, rate and remaining term in the calculator, add whatever you can realistically pay extra, then switch between the two strategies. The interest saved and the months saved both update immediately, on your figures rather than an example. If your lender charges an early repayment fee, add it too; the comparison still holds, it just narrows slightly.
Sources
These guides are information, not financial advice. Your own contract governs the day-count convention, the fees and the early repayment terms, and those vary between lenders and countries. Check any figure against your contract before acting on it.