Loans and savings

Extra payments: lower payment or shorter term

What a prepayment saves each of the two ways, with the amortisation schedule.

$

The effective annual rate on the statement or the bank’s simulator. Months: 180 is 15 years.

$
$

Optional: what you would add to every payment.

Insurance

At 35, 0.0169 % in Bancolombia’s table; it rises with age. Being on the balance, prepaying lowers it too.

$

Fire and earthquake or comprehensive cover, the fixed monthly charge. If the loan ends sooner, fewer months are paid.

A shorter term saves you in interest

COP 35,943,274

You finish 25 payments early with the same payment. Lowering the payment would save COP 10,514,764: COP 25,428,511 less. On insurance you save COP 1,207,843 shortening the term, or COP 180,157 lowering the payment.

  • No prepayment

    Payment
    COP 1,784,484
    Payments
    180
    Interest
    COP 171,207,208
    Insurance
    COP 7,195,819

  • Shorter termSaves the most

    Payment
    COP 1,784,484
    Payments
    155
    Interest
    COP 135,263,933
    Insurance
    COP 5,987,977
    Saving with insurance
    COP 37,151,117

  • Lower payment

    Payment after prepaying
    COP 1,662,373
    Payments
    180
    Interest
    COP 160,692,444
    Insurance
    COP 7,015,662
    Saving with insurance
    COP 10,694,921
0 M75 M150 MYear 5Year 10Year 15
No prepaymentLower paymentShorter term

Amortisation schedule

PaymentPaidInterestPrincipalPrepaidInsuranceBalance
11,784,4841,479,537304,947—49,030149,695,053
21,784,4841,476,529307,955—48,978149,387,097
31,784,4841,473,492310,993—48,926149,076,105
41,784,4841,470,424314,060—48,874148,762,044
51,784,4841,467,326317,158—48,821148,444,886
61,784,4841,464,198320,286—48,767148,124,600
71,784,4841,461,039323,446—48,713147,801,154
81,784,4841,457,849326,636—48,658147,474,518
91,784,4841,454,627329,858—48,603147,144,661
101,784,4841,451,373333,111—48,547146,811,549
111,784,4841,448,088336,397—48,491146,475,152
121,784,4841,444,769339,71510,000,00048,434136,135,437

How it is worked out

Simulate a lump-sum prepayment or something extra every month on your loan, and compare month by month how much interest you save by shortening the term or by lowering the payment.

A prepayment goes entirely to the debt, paying no interest. From that month the balance is lower, and so is the interest in every payment. Keep the payment and the loan ends sooner; lower it and the loan ends on the same date with less to pay each month. Both save, but not the same: here you see how much each way, with your numbers.

The rules it applies

  1. Fixed payment, the French system of almost every peso loan, with the effective annual rate turned into the equivalent monthly one.
  2. The prepayment is made with the payment of the month you choose and goes entirely to principal; the monthly extra, with every payment from the first.
  3. A shorter term keeps the payment and brings the end forward. A lower payment recalculates it with the balance and the months left.
  4. Insurance adds to the payment: life cover is on the balance, so prepaying lowers it too, and the fixed covers are paid for fewer months if the loan ends sooner.
saving = interest without − interest with prepayment

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The same prepayment: 35.9 million saved, or 10.5

A loan of 150 million pesos over 15 years, at 12.5 % effective a year, has a payment of 1,784,484 pesos and pays 171.2 million in interest. If you prepay 10 million with payment 12 and shorten the term, you keep paying the same and finish 25 months early: you save 35,943,274 pesos of interest.

If you use the same prepayment to lower the payment, it drops to 1,662,373 pesos and the loan ends when planned. The interest saved is 10,514,764 pesos: more than three times less for the same 10 million.

Insurance falls as well. With life cover on the balance and fire and earthquake cover on a building insured for 160 million —49,030 pesos the two the first month—, a shorter term also saves 1,207,843 pesos of insurance, and a lower payment, 180,157.

Why a shorter term saves more

With the same payment, everything you no longer pay in interest each month goes to principal, the balance falls faster and the effect compounds month after month. With a lower payment, less principal is paid off each month, the balance falls more slowly and interest keeps being charged on it for the whole term.

Lowering the payment makes sense when what pinches is the monthly outgoing, or if you will invest the difference at a rate above the loan’s, which a risk-free investment almost never beats.

The sooner you prepay, the more you save

Early in a loan almost all of the payment is interest, and an early prepayment avoids interest for more months. On the same loan, 10 million prepaid with the first payment to shorten the term saves 40.5 million; with payment 60, 20 million, and with payment 120, 7.3 million.

A little every month counts too: adding 200,000 pesos to every payment, shortening the term, ends the loan in 140 months instead of 180 and saves 44.5 million in interest.

What Colombian law says: you choose, with no penalty

On a consumer loan from a bank, Ley 1555 de 2012 —literal g of article 5 of Ley 1328 de 2009— lets you repay early, in full or in part, with no penalty or compensation for what the lender stops earning, and choose whether a prepayment shortens the term or lowers the payment; it covers loans of up to 880 minimum monthly wages, and above that the contract rules. On a home loan, in pesos or in UVR, Ley 546 de 1999 says so in numeral 8 of its article 17: the loan can be prepaid at any time with no penalty, and you choose whether the prepayment lowers the payment or the term.

On a home lease Decreto 2555 de 2010 also lets you choose, and adds a third option: lowering the purchase option. And Ley 2032 de 2020 took the same right to cooperatives and to lenders the Superintendencia Financiera does not supervise.

Ask in writing or through your bank’s channel for prepayments, say which of the two you want and check on the next statement that it was applied that way. On UVR loans the payment changes with inflation, so this simulator, with a fixed payment in pesos, does not reflect it; the rule that a shorter term saves more still holds.

Frequently asked questions

Is it better to prepay to lower the payment or to shorten the term?
To save interest, shorten the term, always: in this page’s example it saves more than three times as much. Lowering the payment helps if what you need is to pay less each month.
Can the bank charge me for prepaying?
No, neither on a consumer loan nor on a home loan, in pesos or in UVR. On consumer loans Ley 1555 de 2012 guarantees it for loans of up to 880 minimum monthly wages —above that the contract rules—, and on home loans Ley 546 de 1999, with no cap. Either way you choose whether it shortens the term or lowers the payment.
Which rate do I enter, monthly or effective annual?
The effective annual one, which is how banks advertise it and what appears on the statement. The simulator turns it into the equivalent monthly rate. If you only have the monthly one, convert it yourself: add 1, raise it to the 12th power and subtract 1. A monthly 1.5 % is 1.015 to the 12th, minus 1: an effective 19.56 % a year.
Does a prepayment lower the insurance too?
Life cover does, because it is charged on the balance. Fixed covers, such as fire and earthquake, do not fall, but they are paid for fewer months if the loan ends sooner. Some banks recalculate life cover once a year, or the month after a large prepayment, so the saving arrives in steps.