Extra Payments and EMI

Making extra payments on your loan in Canada or the US can significantly reduce your Equated Monthly Installment (EMI) or shorten your loan term, saving you money on interest and helping you become debt-free faster.

This guide explores how extra payments impact your EMI and loan term, with practical examples for borrowers in Toronto, Vancouver, New York, and beyond. Use our free EMI calculator to see the effects of extra payments on your loan.

Extra payments can be applied in two ways, depending on your lender’s policy:

• Reduce EMI: Extra payments reduce the outstanding principal, lowering the interest charged each month, which can reduce your EMI while keeping the loan term the same.
• Shorten Loan Term: Extra payments reduce the principal faster, allowing you to pay off the loan sooner while keeping the EMI the same, saving on total interest.
• Interest Savings: By reducing the principal, extra payments decrease the total interest paid over the loan term, as interest is calculated on the remaining balance.

Lenders in Canada and the US may have prepayment penalties or restrictions, so check your loan agreement before making extra payments.

The chart below compares the loan balance over time for a $20,000 loan at 5% annual interest over 3 years, with and without an extra payment of $500 every 6 months.

Here’s how extra payments affect a $20,000 loan at 5% annual interest over 3 years in Canada and the US (original EMI: $599.42):

These examples show that extra payments can either lower your EMI or shorten your loan term, saving significant interest in both scenarios.

Here are strategies to effectively use extra payments:

• Regular Small Payments: Make small extra payments monthly or quarterly to steadily reduce the principal.
• Lump Sum Payments: Use bonuses, tax refunds, or other windfalls to make larger extra payments, maximizing interest savings.
• Check Prepayment Policies: Ensure your lender allows extra payments without penalties, which is common in Canada and the US.
• Focus on High-Interest Loans: Prioritize extra payments on loans with higher interest rates to maximize savings.

Ready to see how extra payments can benefit your loan? Use our free EMI calculator to test scenarios for your loan in Canada or the US.