Reduce Interest

Paying down the principal on a loan or mortgage can indeed reduce the amount of interest you’ll pay over time. Here’s how it works:

1. Interest Calculation: Most loans, especially mortgages, calculate interest based on the outstanding principal balance. When you make a payment, part of it goes towards the interest and part towards reducing the principal.

2. Reduced Principal: By paying extra towards the principal, you decrease the outstanding balance. This means that the amount of interest you accrue in the future will be based on this lower balance.

3. Faster Payoff: Reducing the principal can also shorten the length of your loan. With a lower principal, the total amount of interest paid over the life of the loan decreases, and you could pay off the loan sooner.

4. Monthly Payments: Sometimes, making extra payments or paying additional principal can help you lower your monthly payments as well, depending on the terms of your loan.

If you have the option, making extra payments towards the principal (or paying more than your scheduled payments) is a good way to save on interest and potentially shorten your loan term. Just make sure to check if there are any prepayment penalties or restrictions with your loan.