NY_Joe said:

Every month he now has to pay $500. However, he sends in a check for $560. The $500 gets applied to the principle(loan amount) and to the monthly interest. The extra $60 is directly applied to the principle(loan amount). As he continues this month after month he is actually lowering the loan amount he owes them. So the loan will now be paid off sooner b.c the principle is being paid down quicker than the expected 72 months.

So, at the end of 4 yrs and 3 mo he will have his loan paid off and save paying the interest on 1 yr and 9 mo of loan payments. Any payment you make above and beyond the prescribed payment can be applied all to principal b/c you satisfied your monthly commitment to the loan.

Somewhere, someone's math is way off on this. At 5.49%, on a 72 month loan, you flat out will not have 21 months of interest. Here are the 3 terms in question, I am using 25000 as the Purchase amount, because it was my first guess, and the difference between 72 and 60 months was $69, so I figured close enough.

5.49% @ 72 months = $408 payment, 29400 total paid, 4400 interest

5.49% @ 60 months = $477 payment, 28644 total, 3644 interest

5.49% @ 51 months = $551 payment, 28086 total, 3086 interest

The original question was by saving $1000 by paying earlier, it would be paid 1 year and 9 months earlier. Well the problem is that in no cases above, do a year of payments equal a year of interest. Given the longest term, 72 months, a total of $4400 in interest is paid, which is a little less than 11 payment totals.

Lets say that you do pay the 60 month payment on the 72 month loan. In 51 months, you pay 477 x 51 = 24,327. Well some bank won't be satisfied with that, because it is not even the purchase amount of $25,000- and that is not even including any interest- that would be if 100% of every payment went straight to principle.

Assuming equal monthly payments, the forumula is simple, on a simple interest loan with no early payoff penalty (read your contracts for that too!!), you just amortize the loan for the term you want to payoff, in this case for 51 months.

In excel, here is your formula -- > =PMT(interest(/# of payments to make per year),total payments, - Purchase price)

Also, an important note is that your principle and interest amount is not the same for every payment. Simple interest loans are when you make a payment- 1) it pays all interest accumulated to date, 2) it pays down principle -- excess should always be applied to principle by default, however some banks do apply to future payments (if I pay $60 extra now, it lowers next month by $60)--- that is always a bad deal- you always want it taken off principle.