What is overpaying a loan?
Overpaying a loan means making additional payments beyond the standard monthly installment, which allows you to reduce the outstanding debt faster. In practice, this means that a larger portion of the capital is paid off earlier, which automatically reduces the total interest amount charged by the bank. You can do this as a one-time payment – by paying a larger sum – or regularly, e.g., by increasing your monthly installment by a set amount.
In Norway, most cash loans allow free overpayments, but it’s a good idea to check the terms of the agreement beforehand to ensure that there are no additional fees involved.
Loan examples and overpayment analysis
Let’s analyze two examples of cash loans in Norway: 100,000 NOK and 250,000 NOK, with 12% annual interest and a 5-year (60-month) repayment period. We’ll see how overpayment works – how much we save on interest and how it affects capital repayment.
Example 1: 100,000 NOK Loan
- Loan Amount: 100,000 NOK
- Annual Interest Rate: 12%
- Repayment Period: 5 years (60 months)
- Standard Monthly Payment: ~2,224 NOK
- Total Interest (without overpayment): 33,440 NOK
How does standard repayment work?
At the beginning of the loan term, a larger portion of the payment goes toward interest, while a smaller part covers the principal. In the first month:
Interest: 100,000 NOK × (12% / 12) = 1,000 NOK
Principal: 2,224 NOK - 1,000 NOK = 1,224 NOK
Each month, the principal decreases, leading to lower interest payments. Around the halfway point, the ratio of principal to interest is about 50/50, and by the end, nearly the entire payment goes toward the principal.
What happens if you overpay by 1,000 NOK per month?
- New monthly payment: 3,224 NOK
- Repayment period shortened to: 38 months instead of 60
- New total interest paid: 21,104 NOK instead of 33,440 NOK
- Interest savings: 12,336 NOK!
How does it work?
Each overpayment reduces the principal, meaning interest is calculated on a lower amount. For example:
First payment after overpayment:
- Interest: 1,000 NOK (same as before since the principal has just started decreasing faster)
- Principal: 2,224 NOK + 1,000 NOK overpayment = 3,224 NOK
- New principal after first overpayment: 96,776 NOK instead of 98,776 NOK
After a few months, as the principal decreases faster, the interest portion shrinks even more, further accelerating repayment.
Example 2: 250,000 NOK Loan
- Loan Amount: 250,000 NOK
- Annual Interest Rate: 12%
- Repayment Period: 5 years (60 months)
- Standard Monthly Payment: ~5,560 NOK
- Total Interest (without overpayment): 83,900 NOK
How does standard repayment work?
First monthly payment:
Interest: 250,000 NOK × (12% / 12) = 2,500 NOK
Principal: 5,560 NOK - 2,500 NOK = 3,060 NOK
As in the previous example, at the beginning of the loan term, a larger portion of the payment goes toward interest, but this ratio changes over time.
What happens if you overpay by 2,500 NOK per month?
- New monthly payment: 8,060 NOK
- Repayment period shortened to: 42 months instead of 60
- New total interest paid: 54,900 NOK instead of 83,900 NOK
- Interest savings: 29,000 NOK!
How does it work?
First payment after overpayment:
- Interest: 2,500 NOK (same as before)
- Principal: 5,560 NOK + 2,500 NOK overpayment = 8,060 NOK
- New principal after first overpayment: 241,940 NOK instead of 244,440 NOK
Result? The loan is paid off 1.5 years earlier, and interest decreases much faster.
Conclusions
- Overpayments shorten the loan repayment period: in both cases, the loan can be repaid more than 1.5 years earlier.
- Less interest to pay: the higher the loan, the greater the interest savings.
- Regular overpayments are beneficial: each additional payment reduces the loan principal and future costs.
Is it worth overpaying your loan?
✅ Yes, if:
- There are no fees for early repayment – most personal loans in Norway allow free overpayments, but it's worth checking your contract.
- You have savings for emergencies – before making extra payments, ensure you have a financial cushion for unexpected expenses.
- You don’t have more expensive debt – if you have higher-interest loans, such as credit cards (which in Norway can have an APR of up to 20%), it’s better to pay those off first.
❌ No, if:
- You have other obligations with higher interest rates.
- Your bank charges high fees for overpayment.
- You don’t have a stable financial situation.
What else can you do to reduce loan costs?
- Refinancing: If your loan has a high-interest rate, consider looking for a cheaper offer and transferring your loan to another bank. It's often possible to find rates around 10–11%.
- Debt consolidation: If you have multiple loans, combining them into one can lower your monthly payment and make financial management easier.
- Negotiating with the bank: If you have a good credit history, ask for a lower interest rate.
- Monitor your debt: Regularly checking your loan status helps you manage your finances better. Tools like GjeldsMonitor allow you to track your current interest rates, monthly payments, and total debt, making it easier to decide on overpayments.
- Pay off the most expensive debts first: If you have high-interest loans (e.g., credit cards), it's best to clear those first.
- Consult a financial expert: A specialist can help you assess whether overpayments are beneficial in your situation and advise on refinancing options. Professional guidance can make it easier to make the best financial decision.
Summary
By overpaying your loan, you save on interest and get rid of debt faster. Planning your finances wisely helps avoid unnecessary costs and gives you more control over your budget.
However, it's crucial to carefully analyze your loan terms, monitor your debt, and consult an expert if needed to ensure that your financial decisions are the most beneficial for you.