Lump-Sum Prepayment: Shorten the Term or Lower the Payment?

Two years into a $300,000 loan at 6.5% over 30 years, you receive $30,000 — a bonus, an inheritance, the sale of a car — and put it all toward the loan. How much you save depends on one choice: keep the payment and shorten the term, or keep the term and lower the payment.

Shorten the term and the loan ends after 282 months instead of 360, saving $118,431.47 of interest. Lower the payment and your monthly bill drops from $1,896.20 to $1,702.10, but you save only $35,222.02. Same money, same day, a gap of more than $83,000.

What should you compare?

Before you send a lump sum to your lender, weigh these points:

• Interest saved — the total interest you avoid compared with the original schedule.
• Payoff date or monthly payment — one of them changes, never both. Shorten term moves the end date; lower payment reduces the bill.
• Timing — the same lump sum saves more the earlier in the loan you pay it.
• Prepayment fee — a percentage of the amount prepaid, possibly with a minimum per payment and a fee-free point after some years.
• Flexibility — money sent to the lender is hard to get back. A lower payment gives you breathing room every month; a shorter term does not.

Shorten term vs lower payment at a glance

$300,000 at 6.5% for 360 months with equal payments, and a $30,000 lump sum in month 24:

1. Shorten term: the bigger saving

Best for: borrowers who can comfortably afford the current payment and want to be debt-free sooner.

After 24 payments the balance is $293,069.20. The lump sum brings it down in one step:

Balance after month 24  = $293,069.20
Lump sum                = −$30,000.00
New balance             = $263,069.20
Payment stays           = $1,896.20

You keep paying the same $1,896.20, but it is now clearing a much smaller balance. More of every payment goes to principal, which lowers next month's interest, which frees even more for principal. The loan ends 78 months early — 6 years and 6 months — and total interest falls from $382,636.71 to $264,205.24.

2. Lower payment: more room in the monthly budget

Best for: borrowers whose payment feels tight, or who want a safety margin more than a quicker payoff.

With Lower payment, the app recalculates the payment on the new balance over the months that are left:

New payment = payment on $263,069.20 at 6.5% over 336 months
            = $1,702.10

The simulator shows this as "Month 25: scheduled payment $1,702.10 instead of $1,896.20 (excluding extra payments)". That is $194.10 less every month for the next 28 years.

The saving is smaller because the loan keeps its full length. The balance still drops by $30,000, but from then on the smaller payment clears principal more slowly, so the balance stays higher for longer than with a shorter term. The difference between the two options is $83,209.45 of interest.

3. Timing: the earlier, the better

Best for: deciding whether to prepay now or hold the money for a while.

The same $30,000 with Shorten term, paid at different points in the loan:

Early in an equal-payment loan, most of each payment is interest, so principal you clear then stops costing interest for decades. In the last third of the loan, most of the interest has already been paid, and a lump sum saves far less.

4. Pay now with a fee, or wait until it is fee-free?

Best for: contracts that charge a prepayment fee for the first few years.

Say your contract charges 2% of the amount prepaid until period 37. Turn on the Prepayment fee switch, enter 2 in Prepayment fee (% of prepaid amount) and 37 in Fee-free from period:

Paying now and accepting the $600 fee comes out $7,705.71 ahead. The fee is charged once, while the interest on the $30,000 keeps running every month you wait. Even in month 36, one month before the fee ends, paying with the fee still beats waiting by $24.57. Waiting pays off only when the fee is larger than the interest the money would save in the meantime, so run both dates in the simulator and compare Net saving.

5. One lump sum or several?

Best for: people who receive a bonus every year rather than one large sum.

The simulator accepts up to 6 lump sums. Tap + Add another lump sum for each one, with its own amount and Month #. Some comparisons with the same $30,000 in total:

Three $10,000 payments centred on month 24 save almost exactly what one $30,000 payment in month 24 does. Spreading the money over six years saves less, because half of it arrives later.

Minimum fees change the picture. With 2% and a Minimum fee per payment of $300, each $10,000 lump costs $300 instead of $200, so the three payments cost $900 in fees against $600 for the single one.

With Lower payment and several lump sums, the payment is recalculated after each one. The simulator shows the first change, for example "Month 13: scheduled payment $1,832.28 instead of $1,896.20 (excluding extra payments)" for the three $10,000 payments.

6. How to simulate a lump sum in Loan Calculator

Best for: checking your own offer from the lender before you pay.

1. Calculate your loan on the main screen and tap Prepayment simulator under the results, or open it from the Tools tab. The amount, rate, term and method of your last calculated loan fill Loan details.
2. Enter the amount in Lump sum and the month in Month #. Leave Extra amount every month empty if you only want to test the lump sum.
3. Choose Shorten term or Lower payment under After prepaying.
4. If your contract charges for prepaying, turn on Prepayment fee and fill in the percentage, the minimum and the fee-free period as needed.
5. Tap Simulate and read New payoff, Interest saved and, with fees on, Net saving.
6. Switch between Shorten term and Lower payment and tap Simulate again to compare the two.

The prepayment simulator is a Pro tool. Without Pro, you can unlock it for 24 hours with 3 credits.

Which option should you choose?

For regular smaller amounts instead of one-off sums, see extra monthly payments.

FAQ

Does my lender let me choose between a shorter term and a lower payment?

It depends on the contract. Some lenders let you choose, others apply one option by default. Ask before you pay, and simulate the option they will actually use.

What if I leave Month # empty?

The simulator treats the lump sum as paid in month 1. If the month is later than the loan term, you see "The lump-sum month must be within the loan term."

Does this work with equal principal loans?

Yes. Set Interest method to Equal principal. For the same $300,000 loan, a $30,000 lump in month 24 with Shorten term ends the loan 36 months early and saves $51,756.47. With Lower payment, the month-25 payment falls from $2,350.00 to $2,098.22 and $27,382.97 is saved.

Will the lender's numbers match the app exactly?

They should be close. The app uses the annual rate ÷ 12 for monthly interest; lenders may count actual days, round differently or apply the new payment from a different month. Treat the results as estimates and confirm with your lender.

Does the app work offline?

Yes. The simulator runs entirely on your device and works with no internet connection. Your loan figures stay on your phone.